Each year at this time, we are often asked for our views with respect to the proper treatment under Maryland law of abstentions and “broker non-votes” in proxy statements and at meetings of shareholders of Maryland corporations and real estate investment trusts. (Because the same principles generally apply to both corporations formed under the Maryland General Corporation Law (“MGCL”) and to real estate investment trusts formed under the Maryland REIT Law (“MRL”), we shall refer hereafter only to corporations.)

The MGCL, like most corporation statutes, does not deal specifically with the issue of abstentions and broker non-votes. Section 2-506(a)(1) of the MGCL provides that, unless otherwise provided by statute or the charter, a quorum for a stockholders meeting consists of “[t]he presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting . . . .” Under newly-enacted MGCL § 2-506(c), in the absence of a contrary provision in the charter, registered open-end investment companies and corporations having a class of equity securities registered under the Securities Exchange Act of 1934 (the “1934 Act”) and at least three independent directors can lower the quorum by provision in the bylaws to not less than one-third of the votes entitled to be cast at the meeting.

With three exceptions -- special voting requirements for certain business combinations with “interested stockholders” (see MGCL §3-602(b)), approval of voting rights for control shares acquired in a control share acquisition (see MGCL §3-702(a)(1)) and separate class voting (see MGCL §§2-406(b) and 2-506(b)) -- there are four different statutory levels of vote requirements in the MGCL, depending on the matter for which the vote is taken:

(a) Election of directors (MGCL §2-404(d)) -- Plurality of all the votes cast at a meeting at which a quorum is present. No counterpart in the MRL.

(b) Removal of a director (MGCL §2-406(a)) -- Majority of all the votes entitled to be cast for the election of directors (unless the corporation has elected to be subject to Section 3-804(a)). MRL counterpart: §8-205.

(c) Charter amendment (MGCL §2-604(e)); merger, transfer of all or substantially all of the assets, consolidation or share exchange (MGCL §3-105(e)); and dissolution (MGCL §3-403(d)) -- Two-thirds of all the votes entitled to be cast on the matter. MRL counterpart for amendment of declaration of trust and merger: §§8-501(d) and 8-501.1(g), respectively; no counterparts for transfer of assets, consolidation, share exchange or dissolution.

(d) All other matters (MGCL §2-506(a)(2)) -- Majority of all the votes cast at a meeting at which a quorum is present. No counterpart in the MRL.

In each of the foregoing situations, the vote required may be altered by provision in the charter or, in the case of the plurality vote requirement for the election of directors, in the bylaws as well. When there is no counterpart in the MRL, the provisions of the declaration of trust or the bylaws will determine the vote required.

In addition, other laws or rules may impose different vote requirements. For example, Section 312.03 and .07 and Section 303A.08 of the New York Stock Exchange Listed Company Manual (the “Listed Company Manual”) require the approval of a majority of votes cast on the proposal, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal, for equity compensation plans (subject to certain exceptions) and certain issuances of securities.

1. Abstentions. Under MGCL §2-506(a)(1), unless the charter provides otherwise, a quorum is determined by counting the number of shares held by persons who are present “in person or by proxy.” A stockholder who is physically present at a meeting should be counted as “present” for purposes of determining the existence of a quorum, whether or not the stockholder votes. The same rule applies to a stockholder who is “present . . . by proxy . . . .” That is, if a stockholder returns a properly executed proxy or otherwise authorizes a proxy, he or she should be counted as present “by proxy,” whether he or she votes on all matters, only some matters or no matters at all or affirmatively checks the box marked “withhold authority” as to directors or “abstain” as to one or more other matters. An abstention is always counted as present and entitled to vote because presence and entitlement to vote are necessary to the act of abstaining.

With respect to the counting of votes, an abstention is not a vote cast. Larkin v. Baltimore Bancorp, 769 F.Supp. 919, 921 n.1 (D. Md.), aff’d, 948 F.2d 1281 (4th Cir. 1991). The New York Stock Exchange, however, takes an unwritten position that abstentions are votes cast with respect to those matters for which shareholder approval is a prerequisite to the listing of shares under Section 312 of the Listed Company Manual.

If the vote required is either a plurality (see (a) above) or majority (see (d) above) or other percentage of the votes cast, an abstention will have no effect because it will not be a vote cast. If the vote required is either a majority (see (b) above), two-thirds (see (c) above) or other percentage of all the votes entitled to be cast, the effect of an abstention will be the same as a vote against the proposal because an absolute percentage of affirmative votes is required, regardless of how many votes are cast, and neither a negative vote nor an abstention is an affirmative vote.

2. Broker Non-Votes. Many shares of public companies are held of record in “street” or nominee name and the record holders are required to provide proxy material to the beneficial owners and to seek instructions with respect to the voting of those securities. Rule 452 of the New York Stock Exchange permits a broker member to vote on certain routine, uncontested matters (including the election of directors, unless a proposed rule change is approved by the SEC) without instructions from the beneficial owner, so long as the broker has transmitted the proxy material to the beneficial owner. Section 402.08(B) of the Listed Company Manual also lists various matters as to which a broker member may not vote or give any proxy without instructions from the beneficial owner, including any matter which authorizes the implementation of any equity compensation plan or any material revision to the terms of any existing equity compensation plan, whether or not stockholder approval of such a plan is required. (Other securities exchanges have similar rules.)

Votes that, in accordance with stock exchange rules, are not cast by the broker (assuming the broker does not affirmatively abstain) on non-routine matters are known as “broker non-votes.” If the broker (through Broadridge or another agent) does not return a properly executed proxy, then that is treated the same as any other stockholder who does not appear at the meeting in person or by proxy, i.e., the holder is not present for purposes of a quorum and the effect of this act on the result of the vote on each proposal depends upon whether the vote requirement for that proposal is based upon a proportion of the votes cast (no effect) or a proportion of the votes entitled to be cast (effect of a vote against). If the broker returns a properly executed proxy but does not vote on the non-routine item on the proxy, then the holder is present for quorum purposes and the effect of not voting depends upon whether the vote requirement for that proposal is based upon a proportion of the votes cast (no effect) or a proportion of the votes entitled to be cast (effect of a vote against).1 (If the broker returns a properly executed proxy but does not vote (and does not abstain), then the stockholder is present for quorum purposes and the proxy may be voted in accordance with the proxy holder’s discretion if the proxy so provides, as most proxies typically do. This may result in a violation of Rule 452 of the New York Stock Exchange and/or Section 402.08(B) of the Listed Company Manual by the broker.) There cannot be a broker non-vote on a routine matter. If the broker does not vote on a routine matter, that fact is treated in the same manner as a non-vote by any other record holder.

Item 21(b) of Schedule 14A of the SEC’s Proxy Rules requires disclosure only of “the method by which votes will be counted, including the treatment and effect of abstentions and broker non-votes under applicable state law as well as registrant charter and by-law provisions.” While Item 21(b) does not specifically require disclosure of the effect of abstentions and broker non-votes on the determination of a quorum, many companies make that disclosure anyway. Further, even though a proxy statement that provides only for the election of directors and ratification of auditors would not involve any non-routine matters that would result in a broker non-vote, many companies disclose the non-effect of abstentions. It should also be noted that Item 4(c) of Form 10-K and Item 4(c) of Part II of Form 10-Q require disclosure of the results of each matter voted upon by the shareholders during the prior quarter, broken down into the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter.

Considering the requirements of the federal securities laws, Maryland law and the New York Stock Exchange, we recommend for Maryland corporations the forms of disclosure set forth below, which may be varied appropriately in accordance with the proposal and the applicable vote requirement. The bracketed language on quorums is not required by Item 21(b), but is often disclosed as noted above.

Election of Directors by Plurality Vote

The vote of a plurality of all of the votes cast at a meeting at which a quorum is present is necessary for the election of a director. For purposes of the election of directors, abstentions [and broker non-votes -- N.B.: include only if election is contested] will not be counted as votes cast and will have no effect on the result of the vote [, although they will be considered present for the purpose of determining the presence of a quorum].

Election of Directors by “Majority Voting”

The vote of a majority of the total of votes cast for a nominee and votes withheld as to a nominee at a meeting at which a quorum is present is necessary for the election of a director. For purposes of the election of directors, abstentions [and broker nonvotes -- N.B.: include only if election is contested] will not be counted as votes cast and will have no effect on the result of the vote [, although they will be considered present for the purpose of determining the presence of a quorum]. [The foregoing disclosure is suggested in connection with adoption of one type of “majority voting” requirement in uncontested elections only.]

Approval of Extraordinary Action

The affirmative vote of two-thirds of all of the votes entitled to be cast on the matter is required for approval of the proposed [charter amendment, merger, etc.] . For purposes of the vote on the proposed [charter amendment, merger, etc.] , abstentions and broker non-votes will have the same effect as votes against the proposal [, although they will be considered present for the purpose of determining the presence of a quorum].

Approval of Non-Extraordinary Action

The affirmative vote of a majority of all of the votes cast at a meeting at which a quorum is present is required for approval of [specify transaction] . For purposes of the vote on the [specify transaction] , abstentions [and broker non-votes -- N.B.: include this phrase only if the vote is on a non-routine matter] will not be counted as votes cast and will have no effect on the result of the vote [, although they will be considered present for the purpose of determining the presence of a quorum].

Approval of Transaction under Section 312.03 of the Listed Company Manual

The affirmative vote of a majority of the votes cast on the proposal is required for approval of [specify transaction] , provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal. For purposes of the vote on [specify transaction] , abstentions will have the same effect as votes against the proposal and broker non-votes will have the same effect as votes against the proposal, unless holders of more than 50% in interest of all securities entitled to vote on the proposal cast votes, in which event broker non-votes will not have any effect on the result of the vote. [N.B.: The prior sentence depends on interpreting the words “entitled to vote” not to exclude broker non-votes and, therefore, to include them in the denominator. We have confirmed this interpretation, which is consistent with the MGCL, with the New York Stock Exchange. The treatment of abstentions as having the effect of a vote against the proposal is appropriate only if adhering to the unwritten New York Stock Exchange policy that abstentions are votes cast; an abstention is not a vote cast for Maryland law purposes.] [Both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.]

Approval of SEC Rule 16b-3 Plan (Other Than a Discretionary Transaction)

The affirmative vote of the holders of a majority of the shares [or other securities] present (or represented) and entitled to vote at the meeting is required for approval of the proposed [specify name of employee benefit plan or describe specific transaction being submitted pursuant to Rule 16b-3(d)(2)] . For purposes of the vote on the proposed plan, abstentions will have the same effect as votes against the proposed [plan] [transaction] and broker non-votes will not be counted as shares entitled to vote2 on the matter and will have no effect on the result of the vote. [Both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.]

Approval by a 1940 Act Majority

The approval of the proposal requires the affirmative vote of the holders of a “majority of the outstanding voting securities” of the Fund as defined in the Investment Company Act of 1940, which means the lesser of (i) 67% or more of the voting securities of the Fund present or represented at the meeting, if the holders of more than 50% of the Fund’s outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities of the Fund. For purposes of the vote on the proposal, abstentions and broker non-votes will have the effect of votes against the proposal [, although they will be considered present for purposes of determining the presence of a quorum].

N.B.: Be sure to check that the foregoing statutory vote requirements have not been altered by provision in the charter or bylaws.