Last month, the New York Stock Exchange (NYSE) proposed a change to its approach to vote counting for management proposals related to issuing new shares and for shareholder approval of equity compensation plans. More recently, the U.S. Securities and Exchange Commission (SEC) took up the proposed rule1 and submitted it for comments from financial market participants. Comments may be submitted here, up to 45 days from September 29, the date the SEC sent out the notification.
Currently, the NYSE’s standard is that such proposals are only approved if votes ”for” exceed the sum of those “against” plus “abstentions.” In other words, abstentions are counted as votes cast against the proposal.
The NYSE notes that this approach has caused confusion among companies because it often conflicts with their own charter and bylaw provisions as well as the corporate laws of many states, including Delaware.
Delaware, for example, allows companies to state in their governing documents that votes cast for purposes of a shareholder vote includes yes and no votes, but not abstentions; so that a proposal is successful if the votes in favor exceed those cast against. The SEC’s own rules require companies to disclose how votes will be counted, including the treatment of abstentions and broker non-votes, under the relevant state law as well as the company’s charter and bylaw provisions. Many public companies have bylaws that do not treat abstentions as votes cast, in accordance with the appropriate state law.
The NYSE is proposing to amend its rules to harmonize this approach and to avoid future confusion; noting that Nasdaq has a rule that requires proposals receive a majority of “the votes cast,” without defining what ‘votes cast’ means. But Nasdaq has an FAQ on its website that indicates that this lack of definition was purposeful; leaving the decision to company bylaws and/or state law.
Perhaps most importantly, the proposed rule amendment, said the Commission, “would also help ensure that shareholders properly understand the implications of choosing to abstain on a proposal subject to approval under Exchange rules.”
While it is rare for executive or director equity compensation plans to receive negative votes, even with abstentions counted against them, it does happen.
ICS analyzed 2021 voting data for Russell 3,000 constituents finding that just three of 730 equity plan proposals failed to receive shareholder approval since the beginning of the year. Three other companies received approval with a margin of less than 2 percentage points.
ICS looked at each of these companies in detail to see if the vote margins would have materially changed under the proposed standard to lead to a majority vote at those which failed or, conversely, to a minority vote at those which narrowly passed.
At one company, whose amendment to its omnibus stock plan failed, the result was changed only by four percentage points by removing abstentions from the calculation of votes cast against the proposal; but the proposal would still have failed even if that had been the standard. At the other companies, abstentions were not counted. At another company , where a proposal to amend an omnibus stock plan passed by just 1.2 percentage points, the proposal would have failed if abstentions had been counted as votes cast against. Finally, at another company we examined, the narrow margin of approval by 0.7 percentage points for an amended omnibus stock plan would have increased to a margin of 1.6 percentage points had abstentions been excluded
Clearly, while the counting of abstentions as votes against has largely immaterial effects on most vote results, the approach can make the difference between passing and failing in certain infrequent circumstances of which company executives should be mindful.
1Notice of Filing of Proposed Rule Change, September 29, 2021
Head of ISS Corporate Solutions
ISS Corporate Solutions