On April 23, 2020, the New York Stock Exchange (NYSE) proposed a temporary rule change of NYSE Rule 451(b)(1) with immediate effectiveness that extends the deadline by which NYSE member organizations (typically broker/dealers) under selected circumstances must send physical copies of proxy materials to beneficial owners. In light of delays related to the novel coronavirus (COVID-19) pandemic, the NYSE designed the modification with the intention of helping issuers meet their quorum requirements at shareholder meetings and possibly alleviating the need for adjournments or postponements. The temporary rule change applies only to shareholder meetings scheduled to be held up to and including May 31, 2020.
NYSE Rule 452, in conjunction with applicable federal and state laws, generally permits brokers under limited circumstances to vote the shares they hold in “street name” on behalf of certain beneficial owners when voting instructions have not been provided for routine matters (e.g., ratification of auditors). Sending proxy materials to these beneficial owners at least 15 days in advance of the meeting in accordance with Rule 451(b)(1) is one of the prerequisites to brokers voting uninstructed shares on routine matters, and for the beneficial owners of those shares to be counted as “present” for the purposes of determining the existence of a quorum at a shareholder meeting.
Depending on the circumstances, the broker (or its primary intermediary, as its agent, which oftentimes is Broadridge) may transmit the proxy materials either physically or electronically to the beneficial owners. Requiring the proxy-material transmissions to be completed by a designated time period in advance of the shareholder meeting is meant to give the beneficial owners an opportunity to review the materials and forward voting instructions, if they so choose. Because of the production and delivery disruptions to physical proxy materials stemming from the COVID-19 pandemic, the NYSE reduced the number of days before the meeting that the primary intermediary must transmit the physical proxy materials under Rule 451(b)(1) from at least 15 days to at least 10 days before the shareholder meeting. All other requirements and limitations continue to apply. The temporary rule change does not apply to the electronic transmission of proxy materials.
To rely on the relief, the primary intermediary must prominently post on its website specific disclosures including a statement about experiencing operational challenges as a result of the COVID-19 pandemic, the names of the companies whose proxy distributions are affected and a statement encouraging beneficial owners to submit their voting instructions by electronic or telephonic means in advance of the shareholder meeting.
Notwithstanding the permitted extension, brokers are expected to do their best to transmit the physical copies at least 15 days in advance whenever possible.
The impact of the modification will vary by company depending on the quorum requirements and the percentage of shares held by beneficial owners who request or are designated to receive physical materials. According to information provided by the primary intermediary and included in the Securities and Exchange Commission (SEC) release for the NYSE’s application, for the 12-month period ended June 30, 2018, proxy materials were delivered electronically to beneficial owners who collectively owned approximately 84% of all shares of companies covered by the intermediary. (Presumably, the other 16% were held by beneficial owners who were sent physical copies.) In addition, during the same period, the proxy materials were delivered electronically to retail investors who owned 43% of the shares beneficially owned by retail investors. The SEC release further states that, for the 12-month period ended December 24, 2019, the primary intermediary received voting instructions for 30% of the shares held by retail shareholders who received physical proxy materials.
Although the rule change was made effective on an expedited basis, the SEC is accepting comments submitted on or before 21 days from publication in the Federal Register.