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Inspectors Of Election: Some Questions And Answers On “The Basics”

WHY DOES MY COMPANY NEED TO HAVE ONE OR MORE INSPECTORS OF ELECTION?

Business codes typically call for publicly traded companies to have one, two or three – or sometimes more – Inspector(s) of Election to oversee and certify the vote – whenever there is an Annual or Special Meeting of Shareholders. Most non-US companies also require Inspectors, or as they are sometimes called, “Judges of Election” or, in Canada, “SCRUTINEERS”. The Articles of Incorporation and/or the By Laws of most publicly held companies also spell out the role of the Inspector(s)...how many there should be...who should appoint them...and what is to happen at that company if an Inspector should unexpectedly become unable to serve.

WHAT, EXACTLY, ARE INSPECTORS OF ELECTION SUPPOSED TO DO?

Inspectors of Election are typically charged by state law, and in the Corporate Charter documents, with five sets of duties, and sometimes a sixth:

  1. Determing the number of shares that are entitled to vote on each matter before the meeting.
  2. Determining whether a quorum is present, sufficient to allow the transaction of the business that is to come before the meeting
  3. Tabulating, or overseeing the tabulation of all validly executed shareholder votes – whether cast in person or by proxy
  4. Hearing and ruling on any challenges that may be made as to the validity of one or more proxies or ballots present at the meeting
  5. Certifying the final results. In the U.S. the Inspectors’ final report is binding, and can only be reversed in a court of law.
  6. In some states, it is the Inspector, and not the Chair of the meeting who announces when the polls are open and when they are officially closed.

In addition, each Inspector of Election is required to swear and file an oath to “faithfully execute the duties of Inspector of Election with strict impartiality and to the best of my abilities.”

WHO CAN SERVE AS INSPECTORS OF ELECTION?

Any individual person can serve as an Inspector of Election. And, please note, while they may be acting as representatives of a company, Inspectors swear their oaths and serve as individual persons.

DOES THIS MEAN THAT A COMPANY EMPLOYEE – OR A RETIREE CAN SERVE AS INSPECTOR?

Yes, company employees and retirees can and often do serve as Inspectors at “routine” Annual and Special Meetings. As long as they swear their oath to “faithfully execute the duties of Inspector” – and do so, we would add...and can pass the “sniff test” in terms of their ability to carry out such duties in a totally impartial manner. As long as the meeting will indeed be a totally “routine” one, this can be a perfectly fine and a highly cost-effective solution. If any of the outcomes might be “close” however – or worse, subject to challenge by parties who want to have different outcomes, an employee or retiree would probably not be a good choice as Inspector.

WHAT ABOUT A HIRED “AGENT” OF THE COMPANY? SAY AN ATTORNEY, OR THE OUTSIDE AUDITOR, OR A REPRESENTATIVE OF MY TRANSFER AGENT OR PROXY SOLICITOR?

People who work for your outside law firm, auditing firm, transfer agent, and even your proxy solicitor can, of course, and often do serve as Inspectors of Election. Given today’s environment, however – the increasing closeness of many shareholder votes and the increasing scrutiny that the outcomes are receiving from activist investors – it is wise to pay particular attention both to the qualifications of Inspectors and to investor perceptions about their independence and their impartiality.

A CHECKLIST OF QUALIFICATIONS TO CONSIDER BEFORE APPOINTING ONE OR MORE INSPECTORS OF ELECTION:

  • Inspectors need to be persons who will appear to be well- qualified – and who are well-qualified. Their resumes, and the way Inspectors present themselves, should bespeak them as persons with impeccable experience and judgment.
  • Inspectors must understand “the duties of Inspector”: Ideally, they will have well documented procedures as to what, exactly, they do to “inspect”. Very important to note these days, the Inspectors’ actual due diligence efforts need to be commensurate with the types of issues that are up for a vote, and commensurate with the likelihood that the outcomes may be “close” or otherwise subject to challenge.
  • Increasingly, it has become important for Inspectors to be, and to be perceived as being, totally independent persons. Much as with corporate directors these days, persons who are or were employees of the company are not generally considered to be independent where governance matters are concerned. Persons who are affiliated with companies that derive significant income from the company appointing them are often not wise choices either – IF any of the Meeting outcomes could potentially be close or ultimately challenged. In today’s environment, it is often a wise decision to use a totally independent expert to “look over the shoulders” of proxy tabulators as a “double-check” of their work, and to receive and review the work of all submitters of proxies – like proxy solicitors, activist investors and any other bearers of proxies who may show up at the meeting.
  • Inspectors of Election need to be able to stand up to any challenges that may be made – and to explain exactly what they have done to “inspect.” They also need to be able to “push back” diplomatically but firmly – not only to outside challengers, but to company representatives and their various agents, all of whom, of course, have a keen interest in “winning.” The worst possible outcome for a corporate meeting is not losing, we can assure you: It’s declaring a win and having to retract it later.
  • Inspectors should be prepared to deal expeditiously and professionally with any proxies and ballots submitted at the meeting, and to certify the final results without delay. While added due diligence steps are often required these days, corporations, and their investors, have a need for speed as well as certainty as to the meeting outcomes.