October 3, 2012

Clarification of the NYSE’s Preferred Stock Voting Requirements

A member recently sent me the following: Recently, there has been a marked increase in the number of public offerings of preferred stocks and many of those securities are listed. We understand that NYSE Staff has applied a heightened level of scrutiny to the provisions of these preferred issuances, in particular those relating to voting rights of the preferred stockholders. Consequently, it seems timely to share some perspectives gleaned from recent transactions reviewed by the NYSE Staff.

It may be worth noting as an initial matter that the requirements discussed below are not applicable to trust preferred securities, which are not listed under the preferred stock listing requirements set forth in Section 703.05 of the Listed Company Manual. Trust preferred securities are listed under Section 703.19 (“Other Securities”) and are analyzed by the Exchange as structured products rather than as preferred stocks.

The applicable rules are found in Section 313(C) of the Listed Company Manual. The provisions that have generated comments from the NYSE Staff typically relate to the voting rights of preferred stockholders when the issuer proposes to amend the terms of the preferred stock in a manner that would “materially affect” the rights of the holders of the preferred stock.

The threshold question is what constitutes an amendment that ” materially affect[s]” the rights of the preferred stockholders? The NYSE Staff has made it clear that this voting requirement is triggered only in the event of a material adverse effect on the rights of the preferred stockholders and that, generally, these would be changes that relate to the economic rights pertaining to the preferred stock (such as its dividend rate, its liquidation preference, or the creation of a senior issue) or the voting rights of the preferred stock. However, this is not necessarily an exclusive list and you should consult with NYSE Staff if there is any question as to whether a proposed amendment requires a vote.

The area which has generated most confusion, and has led to the NYSE Staff requesting changes to transaction documents, relates to who gets to vote in the event of a material change. Section 313(C) provides as follows:

– Approval by the holders of at least two-thirds of the outstanding shares of a preferred stock should be required for adoption of any charter or by-law amendment that would materially affect existing terms of the preferred stock.

– If all series of a class of preferred stock are not equally affected by the proposed changes, there should be a two-thirds approval of the class and a two-thirds approval of the series that will have a diminished status.

The NYSE Staff has indicated that the above provisions should be understood as follows:

– For matters which affect multiple classes or series of preferred stock, the first bullet above requires that at a minimum the terms of the listed preferred must provide that the listed preferred has the right to vote along with all other outstanding classes or series of preferred stock (either listed or unlisted) that have voting rights and are similarly affected by the proposed action. The proposal must be approved by the votes of two-thirds of all such classes or series considered in the aggregate.

– The second bullet requires that the listed preferred must have the right to vote separately on any proposal which affects the listed preferred in some respect that is more negative than its effect on other classes or series, with a required vote for approval of two-thirds of the listed preferred. If the negative effect is on the listed preferred alone, then the holders of the listed preferred must have the right to vote as a separate class; if it affects multiple classes or series (either listed or unlisted) in the same way, then it is appropriate for all of the affected classes or series to vote together. While it is not explicitly stated in the rule text, the voting requirements of the first bullet can also always be met by providing for a separate vote of the listed preferred, as this is more protective of the holders than a vote in which they share the right to approve the proposal with other classes or series of preferred.

More Fallout in ISS-Proxy Solicitor Leak Case

Back in April, the New York Post revealed the persons involved in a scandal involving the leaking of confidential shareholder votes for money. Now, Reuters reports that ISS has received a Wells notice from the SEC related to a whistleblower complaint made against an employee. Here is MSCI’s related Form 8-K.

Baldness Is Powerful: Yeah, Baby!

In honor of this WSJ article about how baldness can be an advantage in the business world, below is the second pic in my series of bald men in the corporate world (here is the first pic), featuring Pfizer’s Bob Lamm and Alliance Advisor’s Reid Pearson with me at the recent Southeastern Chapter meeting of the Society of Corporate Secretaries:

bald guys.jpg

– Broc Romanek