Governing documents must clarify votes

On September 29, 2021, the Securities and Exchange Commission (SEC)released a messagethat on September 16, 2021, the New York Stock Exchange (NYSE) submitted a proposal to approve a proposed amendment to its shareholder approval rules. The NYSE’s latest proposed amendment to Rule 312.07 would clarify the long-standing confusion over the treatment of abstention votes for certain securities issuances that require shareholder approval by aligning the NYSE rule with the governance documents of an NYSE publicly traded company and applicable state corporate law, which is consistent with Nasdaq Stock Market LLC’s (Nasdaq) practices.

Treatment of abstentions under the current rule

Rule 312.07 governs the treatment of shareholders’ votes and abstentions where shareholder approval is required under certain circumstances. Rule 312.07 specifically applies to shareholder approval of issuances of securities related to stock compensation plans under Rule 303A.08 and other issuances under Rule 312.03 (i.e. certain related party transactions, stock issuances of more than 20% of the outstanding shares of a company and issues resulting in a change of control of the issuer).^[1]However, Rule 312.07 only applies to proposals for which the NYSE listing rules independently require shareholder approval and not to other types of proposals, such as shareholder proposals.

Rule 312.07 provides that a majority of the votes cast is required for shareholder approval of such proposals. While the rule is silent on abstinence, the NYSE has historically:advisedcompanies to treat abstentions as votes cast for the purposes of Article 312.07. This directive has the practical effect of requiring issuers to treat abstentions as voting against a proposal for matters for which NYSE rules require separate shareholder approval. Therefore, if a corporation (i) has a voting standard in its articles of incorporation or bylaws that would apply, (ii) is a publicly traded company on the NYSE, and (iii) must obtain shareholder approval under Rules 303A.08 or 312.03, an abstention shall be counted as a vote against such proposal. In accordance with this practice, relevant proposals are only approved if the votes cast exceed the total of votes cast against the proposal plus abstentions.

In contrast, the Delaware General Corporation Law, Model Business Corporation Act, and Louisiana Business Corporation Act^[2]do not treat abstentions as voting, and many companies similarly specify in their board documents that abstentions are not considered votes cast. For such proposals to succeed, the votes for only need to be greater than the votes cast. Further, while Nasdaq does not define votes cast in its rules, it has provided guidelines that a company must treat votes cast in accordance with governance documents and applicable state law, which differed from the NYSE’s previous guidelines. Not only does the NYSE’s historic treatment of abstentions in the context of Rule 312.07 make it more difficult for such proposals to prevail, it has caused confusion for many NYSE-listed companies and their shareholders about the applicable voting standard.

Proposed changes

The proposed rule change by the NYSE would align the voting standard under Rule 312.07 with the governance documents of a NYSE-listed company and applicable state corporate law, which is consistent with current Nasdaq guidelines. The NYSE is seeking SEC approval for the following change to Rule 312.07 (in bold):

When shareholder approval is a condition of the listing of additional or new securities of a publicly traded company, or when a matter requires shareholder approval, the minimum vote constituting shareholder approval for such purposes is defined as approval by a majority of the votes cast on a proxy proposal relating to the matter in question.For the purposes of the foregoing, a company must calculate the votes cast in accordance with its board records and all applicable state laws.

This amendment does not dictate a specific interpretation of votes cast under Rule 312.07, but, like Nasdaq’s treatment of votes cast, would allow a NYSE-listed company to calculate the votes cast in accordance with governance documents and applicable state law. . The NYSE hopes this change will reduce confusion over the calculation of votes cast and ensure shareholders understand the implications of choosing to abstain on a proposal to be approved under rules 303A.08 and 312.03. . This change will also align the treatment of votes cast under NYSE rules and guidelines with other proposals that shareholders of NYSE-listed issuers vote on.

Public comments on this proposed rule change must be filed within 21 days of its publication in the Federal Register, and the SEC must generally approve or reject the proposed rule change within 45 days of its publication.

Despite this much-needed clarification, the calculation of votes under NYSE and Nasdaq rules, state law, and a company’s governance documents will remain a highly technical issue. As such, companies are encouraged to seek counsel from counsel regarding applicable voting standards and the interplay between relevant exchange rules, state law and a company’s governance documents for the purposes of calculating shareholder votes.

Rachel Solino, a member of the Corporate Practice Group., contributed to this article.

[1] As previously reported, onApr 2, 2021The SEC approved the NYSE amendments to Rule 312.03 of the NYSE Listed Company Manual regarding shareholder approval rules for certain related party securities issuances and those above the 20% threshold, and clarified the definition and procedure for approval by the audit committee of related party transactions under Rule 314.00. Then onAugust 19, 2021the NYSE has proposed further changes to the related party transaction rule.

[2] See DGCL 216(2), MBCA 7.25(c) and comment 4 to MBCA 7.25, and La. RS 12:1-725(C).