Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

While certainly not the first company to use some version of an electronic shareholder forum, Intel is apparently the first company to use Broadridge to help Intel host a virtual shareholder meeting and an electronic shareholder forum. Maybe third-party hosting of these e-forums is the next step in what has been a predicted trend for several years now.

Last year, the SEC issued new rules to encourage electronic forums, namely by providing a framework to ensure that (1) communications within the forums will not be considered proxy solicitations and (2) participants will be not liable for the fraudulent statements of other participants.

In an ideal world, such forums could allow management to gain insight into shareholder opinion in a less formal, and perhaps more responsive, way than voting a proxy card. For example, one of the big criticisms of “say on pay” proposals is that there is no way to know what a “no” vote on a compensation package actually means. High participation in an electronic shareholder forum could provide the opportunity to expand on what such a vote means.

However, there are some hurdles: (1) shareholders don’t have one collective will that can be discerned from electronic comments; (2) shareholders are unlikely to participate in large numbers; (3) e-forums could just be way to gain access to more important closed-door meeting with management; and (4) the loudest participants will be looking for ways to takeover the forum.
 

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The SEC has recently proposed two approaches to restricting short selling. Each of the two proposals could potentially be applied in a variety of ways, but the two broad approaches are as follows:

(1) a new uptick rule that prohibits a short sale for all securities at a price below either the last sale price or the last best bid; or

(2) a “circuit breaker” rule that bans short selling for a particular security if there has recently been a severe decline in price.

A successful short sale occurs when an investor borrows a security, sells it at a high price, and then buys it later at a lower price and delivers the security back to the original security lender. If the investor correctly predicts that a decrease in the price will occur, the investor earns the difference between the sale price and the subsequent purchase price (minus the cost of borrowing the security).

The SEC release for the proposed short sale rules explains the many benefits of short sales, not the least of which is pricing efficiency. The ability to short a stock keeps the price of the stock honest because it affords investors a way to make money if the price becomes inflated. At the same time the SEC worries that short selling is used to manipulate the markets in a “bear raid” by investors spreading false rumors about a stock or taking large short positions to encourage speculation that the stock price will decrease. Some commentators claim this can create a cycle of declining value and confidence in a particular security.

The SEC rule proposals are an attempt to weigh the benefits of short selling against the supposed costs. The problem is that manipulating the markets through short selling is already illegal and a new rule cannot make the practice more illegal than it already is. Just as the SEC doesn’t prohibit taking a long position as a way to combat market manipulation that causes a stock price to rise (pump and dump for example), it seems just as troublesome to prohibit short selling as a way to combat market manipulation that causes a stock price to fall. This is especially true given the benefits that the SEC agrees short selling provides.

At some point false negative rumors and incorrect speculation about a stock prove false. The goal of a short seller spreading false rumors is to get out of the security before this occurs, but enforcement is a better way to discourage this behavior than prohibiting short selling.

The SEC is accepting comments until June 19, 2009, and so far approximately 100 comment letters have been published on the SEC's website.

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RiskMetrics Group discusses here an NYSE rule change that will no longer allow brokers to vote uninstructed client shares in uncontested director elections. The new rule is scheduled to take effect for the 2010 proxy season, but groups such as Business Roundtable and the Society of Corporate Secretaries & Governance Professionals argue it will disenfranchise retail voters.

Corporations like broker votes on uncontested director elections because brokers tend to support management nominees. Institutional investors, on the other hand, presumably would have more power to influence director elections (and by extension, other corporate matters) if brokers cannot vote without instruction. This has become more important as more companies require nominees to obtain a majority of votes cast.

It is hard to argue that a rule against broker votes somehow disenfranchises retail investors who already have the ability to vote but choose not to. Whether or not brokers can vote on routine matters, individual holders can provide their own instructions for how to vote. “Notice and access” rules have resulted in even fewer individual shareholders voting, but the reality is small investors either vote with their feet or rely on larger shareholders to look out for their interests.
 

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