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.