As we enter the 2019 proxy season, we would like to call your attention to certain matters of Maryland law, some new and some continuing, relating to proxy materials and annual meetings about which we often receive questions. Because the same principles generally apply to both corporations formed under the Maryland General Corporation Law (the "MGCL") and to real estate investment trusts formed under the Maryland REIT Law (the "MRL"), we generally refer hereafter only to corporations (or sometimes companies). We are available to review draft proxy statements for Maryland law compliance.
Communicating with the Investment Community. As investors, corporate governance activists and other market participants continue to focus on "good corporate governance," companies should view proxy statements not only as required regulatory disclosure but as a useful opportunity to tell the company's story and communicate with investors and other stakeholders. Indeed, voluntary disclosure highlighting best corporate governance practices, board diversity, director retention, director skill sets and shareholder engagement is not only common but increasingly expected by market participants.
Institutional Shareholder Services Inc. ("ISS"). There have not been any changes to ISS corporate governance policies or positions for the 2019 proxy season that would have a new or different impact on the election of directors of a Maryland corporation or the election of trustees of a Maryland real estate investment trust. For additional information on the ISS bylaw position as reiterated for the current proxy season, please see our Venable Maryland Law memo, "ISS Releases 2019 Policy Survey: Shareholder Direct Amendment of Bylaws."
Quorum and Presence at the Meeting. Under the MGCL, unless the charter provides otherwise, the presence, in person or by proxy, of the holders of shares entitled to cast a majority of all the votes entitled to be cast constitutes a quorum at a meeting of stockholders. In the absence of a contrary charter provision, the MGCL permits the bylaws of a registered open-end investment company and a corporation having a class of equity securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and at least three independent directors to lower the quorum requirement to not less than one-third of the votes entitled to be cast at the meeting. A stockholder who is physically present at the convening of a meeting (including a stockholder who has signed in and leaves after convening but before announcement of the presence of a quorum) 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 (and the proxy holder attends the meeting or properly submits the 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.
Voting Requirements and Abstentions and Broker "Non-Votes". The MGCL addresses quorum and voting requirements at meetings of stockholders but, like most corporation statutes, does not specifically address abstentions and broker non-votes.
Voting Requirements. With three limited exceptions, there are four different statutory levels of default vote requirements in the MGCL, depending on the matter for which the vote is taken:
(a) Election of directors 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 Majority of all the votes entitled to be cast for the election of directors (unless the corporation has elected to be subject to an alternative provision). The MRL contains a counterpart.
(c) Charter amendment; merger; transfer of all or substantially all of the assets; consolidation; statutory share exchange; conversion; and dissolution Two-thirds of all the votes entitled to be cast on the matter. The MRL contains a counterpart for amendment of the declaration of trust, merger and conversion, but there are no MRL provisions governing the transfer of assets, consolidation, statutory share exchange or dissolution.
(d) All other matters 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. In the absence of a counterpart provision in the MRL, the provisions of the declaration of trust or the bylaws will determine the vote required. Furthermore, the board may choose to submit a proposal to the shareholders conditioned on approval (a) by a percentage greater than that required by the MGCL or the MRL or (b) by some group of shareholders, such as a "majority-of-the-minority provision" in connection with a merger with a controlling shareholder. 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 (the "NYSE") Listed Company Manual (the "Listed Company Manual") require shareholder approval by the vote described more fully below for equity compensation plans (subject to certain exceptions) and certain issuances of securities. Item 21(a) of Schedule 14A requires the proxy statement to disclose the votes required for the election of directors and for the approval of any other matter (except approval of auditors).
Abstentions. An abstention is always counted as present and entitled to vote because presence (either in person or by proxy) 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). It is our understanding, however, that the NYSE has taken the position that abstentions are effectively 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 or majority 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 a majority, two-thirds 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 a fixed percentage of affirmative votes is required.
Broker Non-Votes. Many shares of public companies are held in "street" or nominee name in accounts with banks and broker-dealers. These banks and broker-dealers (holding the shares through The Depository Trust Company and its nominee partnership, Cede & Co., the ultimate record owner of the shares) are generally required under Regulation 14A (the "Proxy Rules") of the SEC to forward proxy materials to the beneficial owners and to seek instructions with respect to the voting of those securities. Under Rule 452 of the NYSE, brokers are not permitted to vote without instructions in uncontested director elections. Section 402.08(B) of the Listed Company Manual also lists many matters as to which a broker member may not vote or give a proxy without instructions from the beneficial owner. As a result, there are very few proposals as to which a broker may exercise discretionary authority.
A broker non-vote is a vote that is not cast on a non-routine matter by a broker that is present (in person or by proxy) at the meeting because the shares entitled to cast the vote are held in street name, the broker lacks discretionary authority to vote the shares and the broker has not received voting instructions from the beneficial owner. If the broker votes on a routine matter but does not vote on a non-routine item on the proxy, then the shares held in street name are present for quorum purposes and the effect of not voting on the non-routine matter 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 only matter at a meeting is non-routine, there should be no broker non-votes represented at the meeting, because there is nothing on which the broker is permitted to vote. In such a circumstance, the shares held in street name for which voting instructions have not been received should be treated identically to shares held by a record holder who chooses not to appear at the meeting in person or by proxy, i.e., as unvoted shares that are not present at the meeting.
Item 21(b) of Schedule 14A 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 determining a quorum, many companies make that disclosure anyway.
Considering the requirements of the federal securities laws, Maryland law and the NYSE, we recommend for Maryland corporations and real estate investment trusts the forms of disclosure set forth on Appendix A hereto, which may be varied appropriately in accordance with the proposal and the applicable vote requirement. The bracketed language on quorums in Appendix A is not required by Item 21(b), but is often disclosed, as noted above.
Proxy Cards. The proxy card is the critical document under state law by which most votes of record are generally authorized to be cast. In this regard, it is important to note that "stockholder" is defined by the MGCL as "a person who is a record holder of shares of stock in a corporation . . . ." Under the MGCL, the proxy must be written and must be signed by the stockholder of record or by the record stockholder's authorized agent. Under the MGCL, signing may be (a) by actual signature by the stockholder or the stockholder's authorized agent or (b) by the stockholder or the stockholder's authorized agent causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signatures. Note that the MGCL does not expressly apply to the voting instruction forms sent by or on behalf of brokers or other intermediaries to obtain voting instructions from beneficial owners holding in street name. A voting instruction is not a proxy under Maryland law and, if certain conditions are met, the solicitation by record holders of voting instructions from beneficial owners is generally exempt from the Proxy Rules pursuant to Rule 14a-2(a)(1).
Among the requirements of Proxy Rule 14a-4(a) and (b), the proxy card must state in boldface type who is soliciting the proxies, list the names of nominees for election as directors and enable the shareholder to withhold authority to vote for individual nominees. Proxy Rule 14a-4(b)(2) also requires that if the proxy card provides a means for the shareholder to vote for all nominees as a group, then it must also provide a means to withhold authority to vote for the group.
Electronic Voting. In recognition of the fact that corporations often hire proxy solicitors and other intermediaries to assist in soliciting proxies, the MGCL permits a stockholder not only to authorize another person to act as a proxy but also to authorize an intermediary, e.g., a proxy solicitor, to authorize another person to act as a proxy. Either of these authorizations may be done "by a telegram, cablegram, datagram, electronic mail, or any other electronic or telephonic means." In other words, a stockholder may effectively cast votes by authorization by telephone or internet, even though the MGCL does not expressly permit direct voting by telephone or other electronic means.
Virtual Stockholder Meetings. The MGCL expressly authorizes the board of directors, if it is otherwise authorized to determine the place of a meeting of stockholders, to determine that the meeting will be held solely by means of remote communication. A virtual meeting is subject to certain notice and procedural requirements set forth in the statute. The MGCL also requires the board of directors to provide a "place" for a meeting of the stockholders if requested by a stockholder, which means only that the corporation must provide a physical location, which may be the company's office, for the requesting stockholders to access the meeting on the internet. It does not require the board to transform the meeting into a traditional stockholders meeting held at a single location or to update the notice of the meeting. The MRL does not contain a counterpart to the MGCL provision on shareholder meetings by remote communication and simply requires that the declaration of trust provide for an annual meeting of shareholders "at a convenient location." We believe that a real estate investment trust could permit virtual shareholders meeting in the declaration of trust or bylaws and that it would be prudent to have those provisions generally mirror those in the MGCL. For additional information on virtual stockholder meetings, please see our Venable Maryland Law memo, "Virtual Annual Meetings in Maryland."
Internet Availability of Proxy Materials. Under the Proxy Rules, all filers are required to post their proxy materials on a publicly accessible internet website (other than EDGAR) at least 40 calendar days prior to the meeting and may choose to (a) utilize the "notice and access" model for furnishing proxy materials to shareholders by sending a Notice of Internet Availability of Proxy Materials complying with Proxy Rule 14a-16 (the "Proxy Rule Notice") or (b) deliver a full set of paper copies of the proxy materials, including the Proxy Rule Notice. A Maryland corporation may combine the notice of a meeting of stockholders that is required by the MGCL with the Proxy Rule Notice.
Householding. Proxy Rule 14a-3(e) provides that an annual report, proxy statement or Proxy Rule Notice will be considered to have been delivered to all shareholders of record who share an address so long as one annual report, proxy statement or Proxy Rule Notice, as applicable, is delivered to the shared address and is addressed (a) to the shareholders as a group, (b) to each of the shareholders individually or (c) to the shareholders in a form to which each of them has consented in writing. The Proxy Rules also require compliance with certain other conditions regarding express or implied consents by shareholders.
Although the MGCL does not address delivery of annual reports or proxy statements, it does address the manner in which a corporation may give notice of a meeting of stockholders by providing for four types of notice: personal delivery, leaving the notice at the stockholder's residence or place of business, mailing to the stockholder at the stockholder's address as shown on the records of the corporation and electronic transmission.
Under the MGCL, a single notice is effective as to all stockholders who share an address unless the corporation receives a written or electronic request from a stockholder at such address that a single notice not be given. In lieu of householding, we believe that the only means of delivery permissible under the MGCL is addressing the material to each stockholder "individually" at the shared physical or electronic address. The corporation may deliver these materials in one package if it lists the name of each stockholder-recipient on the label containing the shared address. Additionally, the corporation must include a separate proxy card for each individual stockholder at the shared address. The MRL does not state the permissible methods of delivery of notice to the shareholders and this is customarily addressed by provision in the declaration of trust or bylaws.
Ratification of Auditors. Although quite common, ratification of the board's appointment of auditors is, of course, generally not required under federal or Maryland law. As ratification of auditors is a routine matter under the NYSE rules, brokers are entitled to vote on it without instructions from their beneficial owners. Thus, if there is no other routine matter on the proxy card, inclusion of ratification of auditors on the card may assist in obtaining a quorum for the meeting.
Board Structure and Director Nominations. Item 7 of Schedule 14A of the Proxy Rules ("Schedule 14A") sets forth various requirements with respect to disclosure regarding the composition of the board and the director nomination process. Of particular note are the requirements that the proxy statement include (a) a discussion of the "specific experience, qualifications, attributes or skills" that led to the conclusion that the nominee or incumbent director should serve as a director; (b) a discussion of the leadership structure of the board, including, among other things, disclosure of why the board has determined that its leadership structure is appropriate and the role of the board in risk oversight; (c) the role of compensation consultants and any potential conflicts of interest; and (d) whether the board or nominating committee considers diversity in identifying board nominees, whether the board or nominating committee has a diversity policy and, if so, how it is implemented and its effectiveness assessed. In this regard, there are three important issues under Maryland law:
First, (a) any policy and/or procedures relating to the consideration of shareholder-recommended candidates for director and (b) any specific minimum qualifications for recommendation by the nominating committee for election as a director should be drafted, adopted, disclosed and applied in full coordination with any existing provisions in the charter or bylaws relating to qualifications for election (e.g., minimum or maximum age or ownership of company stock) and procedures for nomination (e.g., advance notice to the company) and with any corporate governance guidelines. With the proliferation of policies, processes, committee charters, guidelines and principles in addition to corporate charters and bylaws it is important that the provisions of all these documents not conflict with each other in either letter or spirit. This also applies to other requirements and duties such as those involving composition of the audit and compensation committees.
Second, the MGCL permits a director "to rely on any information, opinion, report, or statement . . . prepared or presented by" an officer, employee, lawyer, accountant, other expert or board committee on which the director does not serve if the director reasonably believes that, as the case may be, (a) the officer or employee is reliable and competent, (b) the expert is acting within her or his professional or expert competence or (c) the committee merits confidence. This right to rely applies not only to determinations of independence and other matters relating to director nominations but also to any other determination that a director must make. Thus, the availability and presentation of information and advice can be an important element in a director's substantive performance and in protecting him or her from liability. However, directors should guard against over-reliance, especially in the current corporate governance environment. Appropriate reliance can be an important aid to but is not a substitute for the proper exercise of business judgment. The MGCL states that the board's delegation of authority to a committee does not relieve the directors who are not members of the committee of their duties under the MGCL.
Finally, the additional disclosure requirements, including the need to continuously evaluate the qualifications of all directors for service as directors, highlight the importance of an annual board selfevaluation (required by the NYSE) in which each director actively participates. Although Nasdaq does not have a similar requirement, many Nasdaq companies have adopted board evaluation processes as a matter of good corporate governance. We regularly assist clients in the design and conduct of board evaluations. For additional information on board evaluations, please see our Venable Maryland Law memo "Annual Board Self-Evaluations: A Valuable Aid to Board Effectiveness."
Committees. Item 7(d) of Schedule 14A and the rules enacted under the Sarbanes-Oxley Act of 2002 and by the stock exchanges require various disclosures in the proxy statement concerning the audit, compensation and nominating/corporate governance committees, their charters and their members. Item 7(d) currently requires a public company to include these committees' charters as appendices to its annual meeting proxy statement at least every three fiscal years, if the charters are not available to shareholders on the company's website. As a result, most public companies in our experience place these charters on their websites. In addition, Section 303A of the Listed Company Manual requires the charters of the audit, nominating and compensation committees, the corporate governance guidelines and the code of business conduct and ethics to be posted on the company's website.
All committee reports included in the proxy statement should have been reviewed and signed by each member of the committee and submitted to the board and made a part of the board and committee records. Although not required, a committee may want to consider dating these reports. Most importantly, each committee report should be carefully reviewed to confirm that the committee actually did what the report says was done and that the committee took all actions required by its charter.
Indemnification/Advance of Expenses in Derivative Suits. The MGCL requires any Maryland corporation to report in writing to its stockholders, prior to, or with the notice of, the next meeting of stockholders, any indemnification of or advance of expenses to a director or officer in a suit by or on behalf of the corporation.
Deadlines for Shareholder Proposals for Next Annual Meeting. Proxy Rule 14a-5(e) requires the proxy statement to disclose, "under an appropriate caption," (a) the deadline for submitting shareholder proposals for inclusion in the proxy statement and proxy card for the next annual meeting, calculated as provided in Rule 14a-8(e) (Question 5), (b) the deadline for submitting notice of a shareholder proposal for consideration at the meeting, calculated as provided in Proxy Rule 14a-4(c)(1), or under an "advance notice provision, if any, authorized by applicable state law" and (c) the deadline for submitting nominees for inclusion in the proxy statement and proxy card for the next annual meeting pursuant to an applicable state or foreign law provision or a company's governing documents (e.g., a proxy access bylaw).
(a) Inclusion in Proxy Statement and Proxy Card. If the shareholder's proposal is submitted for inclusion in the proxy statement and proxy card for a regularly scheduled annual meeting (often referred to as "Rule 14a-8" or "precatory" proposals), then under Proxy Rule 14a-8(e)(2) it must be received by the company at its principal executive office not less than 120 calendar days before the first anniversary of the date of the proxy statement released to shareholders for the prior year's annual meeting (which is interpreted by the SEC as the date that the proxy statement is first sent or given to security holders).
(b) Proxy Access. For companies that have adopted a proxy access bylaw, a shareholder, upon satisfying certain requirements, may require the company to include in its proxy materials one or more shareholder nominees for director. Most proxy access provisions require a shareholder to comply with the timing and informational requirements included in advance notice provisions in the charter or bylaws, among other requirements.
(c) Presentation at the Annual Meeting. A shareholder may opt not to submit a proposal for inclusion in the company's proxy statement and proxy card but still want to present it at the meeting, or a shareholder may want to nominate an individual for election to the board. If so, the shareholder must comply with any advance notice provision in the charter or bylaws. The MGCL (which expressly applies in this regard to real estate investment trusts under the MRL) authorizes requiring advance notice for stockholder nominations or proposals. We have a fully developed form of advance notice bylaw and, if you have advance notice bylaws that have not recently been reviewed, you may want to do so now so that any amendments may be incorporated in the bylaws (and possibly the 2019 proxy statement) for application to the 2020 annual meeting of shareholders.
Postponement and Adjournment. The MGCL expressly permits postponement of a meeting of stockholders before it is convened and adjournment of a convened meeting to a later date. Typically, a postponement is publicly disclosed not later than the day before the date of the meeting. The notice requirements for postponements and adjournments vary and also depend on the duration of the postponement or adjournment. We believe (and our form of bylaws provides) that the chair of the meeting has broad power to conduct the meeting, including recessing and adjourning it, especially if this authority is specifically conferred by the bylaws.
As discussed above, it is important that the various elements relating to the governance of the corporation the charter, the bylaws, board committee charters and corporate governance guidelines and policies be consistent with one another. A comprehensive review of these documents should be a part of the preparation for each annual meeting. Additionally, in light of the current environment, the board should review the status of the company's defenses against an unsolicited takeover bid.