We’ve heard a bunch about this subject, especially in this season of annual meetings. What’s the big deal? Here’s the deal: the SEC, through its power over the NYSE listing regulations, changed how brokers vote their clients’ shares in corporate elections. This has started to have an interesting and potentially significant impact on these elections. And, it may just make it easier for activist investors to influence elections.
For the past few decades, brokers that have custody of a client’s shares in a corporation have the right to vote these shares in that corporation’s elections. So, any client (institution or individual, hedge fund or not) that doesn’t have the electronic equivalent of the good ol’ stock certificate doesn’t actually own the shares, or at least the right to vote those shares - their broker does.
This made sense a few decades ago, when corporations scrambled to have a quorum present, in person, at an annual meeting. They could rely on a few stockbrokers, rather than hundreds or thousands of shareholders, to represent enough shares to conduct business.
Shareholders retained the final right to vote the shares, of course. They would “instruct” brokers how the broker should represent the shareholder in a given election. Even today, when an investor complete a proxy card, they don’t really cast a vote, but merely instructs the custodian how to vote on their behalf.
But, what should a custodian do if they don’t receive these instructions? After all, then as now, most shareholders didn’t care about these elections. So, to allow corporations to do business at annual meetings, stockbrokers could vote the “uninstructed” shares in their custody as they saw fit.
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