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Continuing Confusion About Shareholder Approval Requirements

I continue to read confused statements in proxy statements about the vote required for shareholder action.  The default voting rule in Delaware is found in Section 216(2) of the Delaware General Corporation Law:

In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders;

This standard is expressed by the following equation:

      Y/(A+N+Y)>.5

A is the number of ABSTENTIONS
is the number of votes cast AGAINST
Y is the number of votes cast FOR

Thus, it is easy to see that in this equation, abstentions have the effect of votes against, but broker non-votes do not.  Because approval is a function of the shares entitled to vote on the proposal, this voting rule is not tethered to the number of shares issued and outstanding.

This default standard, of course, is subject to provisions of the DGCL that impose specific approval requirements.  Delaware, moreover, allows a corporation to specify a different standard in its certificate of incorporation or bylaws.  Thus, some companies have adopted a slightly, but significantly, different standard, substituting “at the meeting” for “on the subject matter”.  For these companies, broker non-votes may have the effect of votes against a proposal because brokers may in some cases be permitted to vote on at least one proposal and thus be entitled to vote at the meeting.  Many corporations include one such proposal in order to increase the likelihood of achieving a quorum.

Some Delaware companies have adopted a “votes cast” standard.  This is a more relaxed standard because abstentions do not have the effect of a vote against because, by definition, they are not votes that have been cast.  The following equation describes a “votes cast” rule:

Y/(Y+N)>.5

The default voting rule in California differs from the Delaware default rule described above.  California Corporations Code Section 602(a) requires the “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)”.   Under a “votes cast” voting rule, shareholder action is taken if and only if:

Y/(Y+N)>.5 and Y>Q/2 where Q is the required quorum

This is essentially a “votes cast” standard with an added proviso.  As with a “votes cast” standard, abstentions and broker non-votes do not count as votes against.  However, the number of abstentions and broker non-votes may affect the outcome to the extent that they prevent the achievement of a majority of the required quorum (expressed as Y>Q/2 above).  Like Delaware, the California General Corporation Law imposes different voting requirements for particular shareholder actions such as amendments to the articles (Section 902).  Unlike Delaware, California does not permit the Bylaws to impose a higher voting standard for stockholder action.  Such a requirement, to the extent permitted, must be located in the articles of incorporation.

© 2010-2017 Allen Matkins Leck Gamble Mallory & Natsis LLP

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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