This is the first of two articles on the topic of majority voting by shareholders in the election of directors. It provides a brief overview of shareholder voting for directors and notes the movement away from plurality voting to majority voting in uncontested elections. The second article will review various design considerations that should be borne in mind by public companies that are contemplating the adoption of a majority vote provision in their charter documents.
The default rule under the corporation laws of most states is that directors are elected by a plurality of the votes cast. Under this voting model, there is no straight up or down vote for director nominees. Instead, the candidate who receives the highest number of "for" votes is elected, whether or not those votes constitute a majority of the votes cast. Although not particularly common in practice, the result of the plurality voting standard is that a nominee who receives more "withhold" votes than "for" votes, or who receives even a nominal number of votes in his or her favor, can still be elected to the board. The plurality voting model was once the prevailing standard and had long governed the election of directors at most public companies.
In recent times, however, many activist shareholders have advocated against the use of plurality voting. They argue that it can lead to unfair and unrepresentative election results in which the majority of a company’s shareholders withhold the authority for their shares to be voted in favor of a director, but the director nominee is still elected to the board by virtue of receiving a plurality of the votes in his or her favor. These shareholders and groups advocating on their behalf have been very effective in their efforts to persuade large public companies to adopt a majority vote standard for the election of directors, prompting a rapid and widespread move away from plurality voting among large public companies. It is quite likely that this trend will continue into the middle market as investors expect smaller public companies to follow the lead of the major corporations and adopt what is being seen as a corporate governance best practice.
Some companies may wish to adopt a "plurality plus" voting model, in which the company retains a plurality threshold for the election of its directors, but voluntarily adopts a resignation policy that will only come into play when and if a director fails to receive a majority of votes cast in favor of his or her re-election. The resignation policy may require either all directors to submit an irrevocable resignation upon their election to the board or any directors who receive a majority of votes "withheld" to submit their resignation to the board within a specified timeframe of the relevant vote. Generally, under these policies the board retains the authority to decide whether such a resignation is ultimately accepted. In making its decision, the board has wide discretion, as the propriety of any such decision will, in most cases, be evaluated by the business judgment rule.
Activist shareholders have increasingly indicated their dissatisfaction with this approach. As an alternative, they have brought pressure on companies to amend their bylaws or certificates of incorporation to directly require that all directors be elected by a majority of votes cast, except in the case of contested elections. Some companies have chosen to do so voluntarily, while others have been forced into line after shareholders have brought and approved a shareholder proposal requiring an amendment as part of the annual meeting of shareholders.
When a company adopts a majority voting standard via an amendment to its charter documents, it is important that it also carefully consider the mechanics relating to the outcome of a director failing to receive a majority vote. These mechanics are particularly important in states like Delaware, where the company may find itself with a "holdover" director due to the phrasing of the state corporation law statute, which may provide that directors hold office until the director’s successor is elected and qualified or until his or her earlier resignation or removal.
As it is likely that there will be a continued push by activist shareholders to replace plurality voting with the majority voting standard in uncontested director elections, middle market companies should be ready to address this topic with their boards and shareholders as the 2013 proxy season approaches. For companies to be able to respond to these developments, an understanding of the various alternatives and design considerations will be required. The second part of this article will review these matters in detail.