California And The “Entitled To Vote” Standard
Recently, I came across a proxy statement for a California corporation that stated the vote required for shareholder action on several proposals was “the affirmative vote of the majority of the shares represented at the Annual Meeting and entitled to vote on such matter”. While this statement was consistent with the voting standard enunciated in the Company’s bylaws, is it consistent with California law?
Corporations Code Section 602(a) provides that default rule for shareholder action is “the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum)”. This is a “votes cast” standard with an added twist – the number of affirmative votes must constitute at least a majority of the required quorum. The voting standard stated in the proxy statement differs from the default rule in two respects.
First, it requires the affirmative vote of the shares represented and entitled to vote on the matter. Under this standard, abstentions will have the effect of votes against. Under the California default rule, abstentions do not have this effect except insofar as abstaining results in the number of affirmative votes being less than a required quorum. Second, the proxy statement makes no mention of the additional requirement that the number of shares voting affirmatively also constitute a majority of the required quorum.
Section 602(a) establishes a default standard, meaning that it applies unless the General Corporation Law or the articles requires a higher vote. The statute makes no mention of a higher vote being imposed solely by the bylaws. This means that “[s]uch a provision [requiring the vote of a larger proportion of the shares] must be included in the articles in order to be effective and cannot validly be provided for merely in the bylaws”. Harold Marsh, Jr., R. Roy Finkle, and Larry Sonsini, Marsh’s California Corporation Law § 5.14[F]. Further, the articles may not impose a higher vote requirement with respect to certain corporate actions. Cal. Corp. Code § 204(a)(5).
Note to readers: I have contributed to various chapters of Marsh’s California Corporation Law.