Shareholder Voting

• Pages: 319-378
• Author: Stephen M. Bainbridge

319

Chapter 10

SHAREHOLDER VOTING

§ 10.1 Introduction

Shareholder voting can serve three different purposes,

depending upon the nature of the firm in question. Consider, as the

first category, firms with a small number of shareholders all of whom

have ready access to firm information and homogeneous preferences.

In such a case, voting is effectively an exercise of managerial power.

Both strategic and tactical business decisions can be made efficiently

through voting, because in such a firm there is no need to incur the

costs of retaining specialized managers. Accordingly, such a firm

usually will lack the separation of ownership and control

characteristic of public corporations.

A second category of firms include those that are more complex,

but in which there are controlling shareholders. Such a firm displays

partial separation of ownership and control. Controlling shareholders

of such firms have substantial access to firm information and retain

incentives to cast informed votes. Although the firm probably will

have a professional managing body, the managers face a real

possibility of being voted out of office by the controlling shareholder

if their performance is sub-par. Hence, voting again has both

managerial and oversight functions.

In the final category of cases, the firm is highly complex, the

shareholders are numerous and have diverse preferences, and the

shareholders lack both the knowledge and incentives necessary to

exercise an informed vote. Such a firm displays complete separation

of ownership and control.

In all corporations, statutory shareholder voting rights are quite

limited. Recall that, under DGCL § 141, the corporation’s business

and affairs are “managed by or under the direction of a board of

directors.” The vast majority of corporate decisions accordingly are

made by the board of directors acting alone, or by persons to whom

the board has properly delegated authority. Shareholders have

virtually no right to initiate corporate action and, moreover, are

entitled to approve or disapprove only a very few board actions. The

statutory decision-making model thus is one in which the board acts

and shareholders, at most, react. In the first two classes of

corporations, however, it is possible for shareholders to depart from

the statutory rules by agreement. We take up such agreements in

Chapter 14.

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SHAREHOLDER VOTING

Ch. 10

§ 10.2 State Law

A. Overview

Shareholders normally vote only at properly noticed and called

shareholder meetings.

1

All statutes require that there be at least one

shareholder meeting a year (called, logically enough, the annual

meeting of shareholders). In addition, all statutes have some

provision for so-called special meetings—i.e., meetings held between

annual meetings to consider some extraordinary matter that cannot

wait. Who is entitled to call a special meeting varies from state to

state. Almost all state corporation laws allow the board to call a

special meeting. Most allow a specified percentage of the

shareholders acting together to call a special meeting. A few allow a

specified corporate officer, such as the president or chairman of the

board, to call a special meeting. MBCA § 7.02(a)(1) empowers the

board of directors and any other person authorized by the articles or

bylaws to call a special meeting. MBCA § 7.02(a)(2) empowers the

holders of at least 10% of the voting shares to call a special meeting.

The articles may specify a lower or higher percentage, but not to

exceed, 25% of the voting power. In contr ast, per DGCL § 211(d)

special meetings may be called only by the board of directors and any

other person authorized by the articles or bylaws.

Whether it is an annual or special meeting, most shareholders

will not show up in person. Large corporations with thousands of

shareholders frequently hold their shareholder meetings in small

halls or even just a very large conference room. Most shareholde rs

vote by proxy. (In a sense, proxy voting is the corporate law

equivalent of absentee voting.) Since the 1930s, proxy voting has

been extensively regulated by the federal securities laws. Hence,

1

A majority of states allow shareholders to act without a meeting by

unanimous written consent. See, e.g., MBCA § 7.04. A substantial minority, including

Delaware, permit shareholders to act by written consent even if the shareholders are

not unanimous. Specifically, DGCL § 228(a) provides:

Unless otherwise provided in the certificate of incorporation, any action

required by this chapter to be taken at any annual or special meeting of

stockholders of a corporation, or any action which may be taken at any annual

or special meeting of such stockholders, may be taken without a meeting,

without prior notice and without a vote, if a consent or consents, setting forth

the action so taken, shall be signed by the holders of outstanding stock having

not less than the minimum number of vote s that would be necessary to

authorize or take such action at a meeting at which all shares entitled to vote

thereon were present and voted and shall be delivered to the corporation in

the manner required by this section.

Most actions requiring a shareholder vote under Delaware law require approval by a

majority of the voting power of the shares present at a meeting at which there is a

quorum. A few require approval by a majority of the voting power of the company’s

shares. The “minimum number of votes that would be necessary to authorize or take

such action at a meeting at which all shares entitled to vote thereon” thus would be a

majority of the voting power of the outstanding shares.

§ 10.2

STATE LAW

321

many of the mechanics of shareholder voting are governed by federal

rather than state law. Generally speaking, state law governs

substantive aspects of shareholder voting, such as how many votes a

shareholder gets, when they get to vote, and the types of q uestions

on which they get to vote. Federal law governs the procedures by

which shareholders vote and the disclosures to which shareholders

are entitled.

B. Notice, Quorum, and Votes Required

Virtually all state corporate codes adopt one vote per common

share as the default rule, but allow corporations to depart from the

norm by adopting appropriate provisions in their organic documents.

Firms have devised at least three variants on the traditional model,

each of which in some way repackages the bundle of rights associated

with common stock: non-voting stock, dual class stock in which each

class has different voting rig hts, and common stock having only

voting rights. All of the major stock excha nges, however, have

adopted listing standards severely restricting the use of such

variants and they are therefore rare.

Whether shareholders will vote in person or by proxy, statutory

notice and quorum requirements must be satisfied if their action is

to be valid. MBCA § 7.05(a), for example, requires no less than 10 but

no more than 60 days’ notice for both annual and special meetings.

Under MBCA § 7.05(b), notice of an annual meeting need not state

the purposes for which the meeting is called, although the federal

proxy rules mandate such notice. Under MBCA § 7.05(c), by contrast,

only those matters specified in the notice may be taken up at a special

meeting.

The Model Act’s default quorum is a majority of the shares

entitled to vote, although the articles of incorporation can specify

either a higher or lower figure.

2

Although there is some case law to

the contrary, the Model Act effectively precludes a shareholder from

“breaking the quorum” by leaving the meeting. If a shareholder’s

stock is represented at the meeting in person or by proxy for any

reason, that shareholder’s stock is deemed to be present for quorum

purposes for the remainder of the meeting.

3

Subject to the special rules governing election of directors and

group voting, which are discussed in subsequent sections, MBCA

2

MBCA § 7.25(a). Delaware law is similar, except it forbids the articles from

setting a quorum of less than one-third the shares entitled to vote. DGCL § 216.

3

See MBCA § 7.25(b); but see, e.g., Levisa Oil Corp. v. Quigley, 234 S.E.2d

257 (Va.1977) (shareholder may break quorum by departing meeting); see also

Textron, Inc. v. American Woolen Co., 122 F.Supp. 305 (D.Mass.1954) (shareholder

present before a quorum is established may depart and, if so, may not be counted

towards a quorum).