On January 27, 2009, Governor Corzine signed into law a bill amending two sections of the New Jersey Business Corporation Act, which will now allow a New Jersey corporation to adopt majority voting procedures through a by-law amendment. As a result of the new law, a corporation can adopt majority voting without having to go through the expense and formality of obtaining shareholder approval to make an amendment to its certificate of incorporation.
The new law amends N.J.S.A. 14A:5-24 and 14A:6-3 to: (1) allow a board of directors to amend a corporation's by-laws to provide for majority voting, and (2) allow director resignations to become effective upon the occurrence of future events, such as the failure of such director to receive the affirmative vote of a majority of shares at an annual meeting.
Previously, directors of New Jersey corporations were elected by a plurality of votes unless otherwise provided in the certificate of incorporation. As a result of the new law, a New Jersey corporation may now eliminate plurality voting and adopt majority voting through an amendment of its by-laws. The amendment of a corporation's by-laws does not typically require shareholder approval and can be effectuated by board action. However, in the event a certificate of incorporation specifically provides for plurality elections, an amendment to the certificate of incorporation would still be necessary to change the voting standard.
A plurality voting system only requires that a candidate receive more votes than any other candidate, whereas majority voting requires that the candidate obtain more than 50 percent of the votes cast (i.e., more votes cast "for" the nominee than votes "withheld"). Plurality voting is frequently criticized for providing too low a threshold for re-election and thereby rendering boards unaccountable for their actions. In a contested election, the plurality rule normally continues to apply.
A related amendment allows directors to resign from office upon the occurrence of a certain event or events specified in the notice of resignation. Previously, a notice of resignation was either effective upon receipt or at some subsequent indicated time. As a result of the new amendment, a resignation may be contingent upon the occurrence of a future event. It is anticipated that directors may utilize this amendment to resign from the board upon the failure of such director to obtain a majority of affirmative votes at an annual shareholder meeting. The amendment further provides that any resignation contingent on a director failing to receive the necessary number of votes "shall" be irrevocable. Delaware law, in contrast, provides that resignations in such circumstances "may" be irrevocable.
Both amendments serve to further align New Jersey's business law with that of Delaware and make the adoption of majority voting by New Jersey corporations easier to implement. The amendments reflect the growing practice of leading corporations to adopt majority voting, a practice which enhances their corporate governance reputation and is becoming the prevailing election standard among large public companies. The board's ability to unilaterally change the prescribed voting standard also maintains board flexibility, since the voting standard could be amended again by board action.
A corporation considering adopting a majority voting standard should fully consider the implications of such actions and should ensure that the board is informed on the subject. We would be happy to assist you in amending your by-laws to implement majority voting procedures.