Publications: Articles Authored by Julius J. Brecht

What is a broker non-vote?
By Julius J. Brecht [1]
For The Alaska Journal of Commerce

It's the time of year when many companies prepare for and hold their annual security holder meetings. As a part of that procedure, you as a shareholder or possessor of a beneficial interest in shares in a corporation may have recently received a copy of management proxy materials that include reference to "broker non-votes".

What are broker non-votes? When may they be used? How do they affect your right to have your vote counted?

A broker non-vote generally occurs when a registered broker, who holds securities in street name, has not received voting instructions from a customer having beneficial ownership in the securities. In this instance, a question immediately arises as to whether, and to what extent, the broker may vote the shares in conjunction with the meeting.

Proxy materials announce the date of, and explain the items on, the agenda for the meeting. For a corporation, that agenda typically includes an election of directors to the company's board. It may also include other matters which management wishes to bring before shareholders for a vote.

Holding an annual shareholder meeting is typically required under state law. An immediate challenge to management in organizing and holding the meeting is having assurance, in advance, of the presence of a quorum of the shares outstanding for it. Without the presence of a quorum in person or by proxy, state law prohibits the meeting going forward.

In part to ensure in advance the likelihood of a quorum, management usually includes a proxy card in the proxy materials and urges its shareholders to complete and return the card in advance of the meeting. Management knows in advance the number of shares outstanding and eligible to vote as of the record date it selects for the meeting. The necessary quorum can easily be determined based upon state law and as set forth in the company's articles of incorporation or bylaws.

A company whose stock is publicly traded on an exchange or in a stock market is required to prepare proxy materials in accordance with a specified outline set forth in federal regulations adopted by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Examples of such trading include the New York Stock Exchange and the Nasdaq Stock Market.

The outline includes disclosing the method by which votes will be counted. Specifically, the treatment and effect of abstentions and broker non-votes under applicable state law as well as the company's articles and bylaws must be disclosed.

A company, in sending out an annual meeting notice to its shareholders, must rely upon the list of shareholders of record as maintained by it. A person may choose to have the person's voting stock transferred into the name of the person's broker, or another entity acting in a fiduciary capacity, while retaining the beneficial interest in the stock. In so doing, the broker's name and address (sometimes referred to as "street name"), and not the person's name, is included in the company's shareholder list.

A broker who is registered under the Exchange Act and registered with an exchange or stock market is subject to rules of conduct in dealing with its customers. In particular, when a broker receives proxy materials, including a notice of annual meeting, the broker must under these rules timely forward the proxy materials to the beneficial owner of the stock.

The broker must also inform the beneficial owner of the limited time period and necessity for completing the proxy card and forwarding it to the company prior to expiration of that time period in order for the shares to be represented at the meeting. This rule simply prohibits discretionary voting by the broker without explicit instructions from the beneficial owner.

What does this regulatory procedure mean for an Alaskan company in addressing broker non-votes? What does it mean for an Alaskan shareholder in a company possibly incorporated outside of Alaska?

First, a company incorporated in Alaska is subject to the Alaska Corporations Code. Second, a company incorporated in a jurisdiction other than Alaska is subject to the corporate law of that jurisdiction, including provisions on broker non-votes, if any.

The Alaska Corporations Code establishes basic requirements regarding annual meetings and proxy voting. However, it is silent regarding broker non-votes. As a practical matter, an Alaskan company may be limited by what a registered broker, in handling the company's stock, is allowed to do under exchange and stock market rules.

Nasdaq has a rule prohibiting discretionary voting by a broker that is not limited to the subject matter of the vote. In contrast, NYSE has a specific rule establishing limited circumstances when a broker is forbidden from voting broker non-votes in the context of equity compensation plans.

The SEC recently approved new rules proposed by both NYSE and Nasdaq to require shareholder approval of an action by a company to establish a new, or adopt material amendments to an existing, equity compensation plan, e.g., a stock option plan. Under these rules, no longer will all "broadly-based plans" be exempted from the shareholder approval requirement.

In this limited application, both NYSE and Nasdaq are consistent in prohibiting, in effect, the use of broker non-votes. Many other domestic regional and national exchanges have subsequently adopted similar provisions eliminating the use of broker non-votes in the context of equity compensation plans.

It may be argued that a beneficial owner who has not responded to a broker's timely forwarding of management proxy materials has in effect chosen to abstain from the vote on the matters identified in the proxy card. However, the broker, as the registered owner of the stock, may return the proxy to the company, and the proxy may be counted for purposes of establishing a quorum for the meeting.

A cursory review of recent company proxy statements filed with the SEC shows a number of ways in which broker non-votes are addressed. For example, some state that such votes are not counted for certain matters considered non-discretionary (specific matters presented in the proxy card for a vote) where the broker does not have instructions from the beneficial owner. Others state that such votes are counted for "routine" matters or not counted for "non-routine" matters. Still others state that such votes are not counted for any purpose other than establishing the presence of a quorum.

Some companies or their shareholders have had to go to court in an attempt to resolve issues of just how broker non-votes are to be handled.

A company and its shareholders must exercise caution in addressing broker non-votes. On the company's part, include a clear statement in the management proxy materials as to how such votes are to be handled.

On the part of a beneficial owner of shares held by a broker, the following are offered as three steps to avoid the pit falls of broker non-votes:

Confirm that your broker follows a policy of timely forwarding proxy materials to you and how the broker may vote your shares should you not respond to the forwarding materials.

In following these steps, you as a beneficial owner may ensure that your vote is counted on issues most critical to the future of your company. Annual meeting voting is one of the few ways you as a shareholder can affect the policy and direction of your company and consequently the value of your investment in the company.

[1] Mr. Brecht is an attorney in private practice and shareholder with the law firm of Wohlforth, Johnson, Brecht, Cartledge & Brooking, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law and corporate and finance law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached at .

< Back to Articles Authored by Julius J. Brecht