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Outré Shareholder Proposal Seeks Elimination Of Cumulative Voting Protections

Last month, Cisco Systems, Inc. submitted a no-action letter request to exclude a shareholder proposal submitted by James McRitchie.  The fact that Mr. McRitchie has submitted a proposal is by no means newsworthy - he has filed scores this proxy season (see this list).  What is unusual is that he is seeking to do away with the protections that California affords to minority shareholders through cumulative voting.  He is asking Cisco's Board of Directors "to undertake such steps as may be necessary to permit removal of individual directors by a majority vote of shareholders with or without cause and without suppositions with regard to cumulative voting."

Cisco is a California corporation.  As such, director removal without cause is governed by Section 303 of the Corporations Code.  That statute generally provides that any or all of the directors may be removed without cause by approval of the outstanding shares (i.e., the affirmative vote of a majority of the outstanding shares entitled to vote).  However, except in the case of a classified board, no director may be removed (unless the entire board is removed) when the votes cast against removal, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively at an election at which the same total number of votes were cast (or if the action is taken by written consent, all shares entitled to vote, were voted).   This provision applies even when a corporation, like Cisco, does not permit cumulative voting. 

While this additional requirement could prevent, or make more difficult, the removal of a director, it is intended to protect minority shareholder rights.  Without such a provision, a director elected by cumulative voting could be removed without cause by the majority shareholder(s).  This would vitiate the minority's power to elect directors.  

Based on the Mr. McRitchie's supporting statement, he seems to be motivated by Vice Chancellor Laster's ruling in In re Vaalco Energy Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (Laster, V.C.) (Transcript Opinion).  That case, of course, concerned Delaware (not California) law and addressed the validity of charter provisions providing that stockholders may only remove directors for cause.  Accordingly, Vaalco has no relevance whatsoever to California's without cause removal statute.  

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 220

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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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