Why You Might Want To Aim Higher When Seeking Equity Plan Approval
Yesterday's post highlighted one company's confusion about the vote required for shareholder approval of an equity compensation plan under the California General Corporation Law. Because the GCL does not impose a specific requirement for shareholder approval of equity compensation plans, the default rule for shareholder action in Section 602 applies unless the corporation's articles of incorporation prescribe a higher vote. The default standard 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). I can think of at least two good reasons why companies may want to set their sights a bit higher when seeking shareholder approval.
First, approval may come in handy if it later turns out that the corporation has insufficient authorized but unissued shares to to satisfy exercise of outstanding options. Corporations Code Section 405(b) provides that if a corporation has obtained approval of the outstanding shares for the issuance of options to purchase shares, the board of directors, without further approval of the outstanding shares, may amend the articles to increase the number of authorized shares to meet the need. Corporations Code Section 152 defines "approval of the outstanding shares" as "approved by the affirmative vote of a majority of the outstanding shares entitled to vote". This approval includes the affirmative vote of a majority of the outstanding shares of each class or series entitled, by any provision of the articles or of the GCL, to vote as a class or series on the subject matter being voted upon and also includes the affirmative vote of such greater proportion (including all) of the outstanding shares of any class or series if such greater proportion is required by the articles or the GCL. This benefit is only available to California corporations.
The second reason to obtain approval of the outstanding shares is to meet the requirements of the Commissioner of Business Oversight's stock option rule. 10 CCR § 260.140.41(g). That rule requires that a stock option plan be approved by a majority of the outstanding securities entitled to vote within a specified time period. This rule comes into play in two situations. First, it is the standard applied by the Commissioner when reviewing an application for qualification to sell securities under a plan. Second, it is a condition to the exemption for option plans pursuant to Corporations Code Section 25102(o).