Our Newly Revised Primer on Tabulation and Reporting Shareholder Meeting Votes
We last issued our primer on tabulating and reporting on shareholder meeting votes in 2009 - and, since then, there have been so many changes in the landscape, we realized that an updated version was due…right about now…so here it is:
The first commandment when it comes to tabulating and reporting Meeting results is this: “Always prove every item to the Quorum.” Doing this will essentially guarantee that all of the numbers you report will be correct. As we reminded way back in 2008, it would immediately have uncovered the tens of millions of votes that went missing in that year’s election of directors at Yahoo, to the painful embarrassment of all concerned.
• What does this mean in practice? Add up (and ideally, have your tabulating system automatically add up) the For, Withheld, Against, Abstain and any “non-votes” and “no-votes” (in the case of offsetting split-votes by co fiduciaries) for each director and each item on the ballot – to be sure that each of the totals you are reporting are the same as the total you are reporting as the Quorum.
• What is the Quorum? It is the sum-total of all the shares (or voting power, if there are classes of stock with more or less than one vote per share that are entitled to be part of the quorum) that are “present at the meeting in person or by proxy”. Thus, there may be a different quorum, please note, for different agenda items. • Please note too that simply being present in the meeting hall – even if one does not cast one’s vote on a single matter – is normally considered as being “present” for the purposes of determining whether or not there IS a quorum. But this is only important to consider where there is the possibility that some voters may try to postpone or prevent a meeting by preventing a quorum from being present. If this may be a potential issue, have every attendee sign in, and verify the shares they have - then sign them out and subtract their shares from the quorum if they leave without voting.
• The second commandment of tabulating and reporting is to always know – and to always disclose clearly in the proxy statement – exactly what it takes for a proposal to “be approved”. These facts should always be findable in a company’s Articles of Incorporation or Bylaws. Typically they arise from the corporate code of the company’s state of incorporation, but very often, the company, or its shareholders, have adopted special provisions (like a super-majority provision, for example) that supersede the “standard” state law provisions.
• A very important corollary to the second commandment - let’s call it the third commandment - is to pay particular attention to all the “classes” of stock your company may have outstanding, since shareowners of such classes may or may not have a vote on particular matters, and often, the voting power is more, or less, than one vote per share. (Every single year we encounter dozens of cases where this critical information – on exactly what it takes to pass a proposal - is not disclosed, or in some cases is disclosed on one page, but contradicted on another… or is contradicted by an “explanation” – like the wacky explanations of the effect of abstentions and of “broker non-votes” that are being gratuitously inserted like mad these days by eager-beaver lawyers).
• There has been a major set of voting developments since we first wrote this primer in 2009 that also need increasing attention as a codicil to the ‘third commandment”: We have been witnessing a big upsurge in the existence of “Voting Agreements” - both in connection with major investors in IPOs, where the founders want to exert continued control - and also in terms of merger agreements - when insiders and other major holders are being required to vote with the management positions on a wide variety of matters that may arise. Another big trend is to require that a merger vote needs to achieve a “majority of the minority holdings” or a majority vote without the votes of “interested parties” in order to bullet-proof the merger against law suits. Arrangements like these require special efforts on the part of public companies - and their vote tabulators - to identify the individual accounts and the share-holdings that are affected - and exactly where there holdings are held, which often proves to be a mix of registered accounts and, very often, multiple accounts at various brokers, banks or other custodians.
DETERMINING WHETHER A PROPOSAL HAS BEEN APPROVED - OR NOT:
• The most common standard for “passing” a proposal – and generally the easiest to meet - is “a majority of the shares present at the meeting in person or by proxy”… or, in other words, one-half the Quorum (once there IS a quorum of course) plus one vote. Thus, many proposals can “pass” with as little as 25% of the outstanding shares plus one vote. (There has been a new wrinkle here too since 2009, in that many companies have changed the standard for approving certain proposals to be “a majority of the votes present and entitled to vote on the matter” - which makes it clear that broker non-votes are not to be included in the denominator - which can often take companies by surprise, when there are a large number of Abstentions and Broker-Non-Votes relative to actual voters on a given matter. The next most common standard for passing a proposal is “a majority of the votes cast”: Here is where it becomes important to recognize that “abstentions” – and so-called “broker-non-votes” are NOT “votes cast”…and thus, such votes and “non votes” make it harder for the proponent to get the needed Yes votes. Only the For and Against votes count – and they are the only votes to be included in the denominator if you feel obliged to report percentages.(There is a rather weird NYSE rule worth noting here - that abstentions ARE to be considered as “votes cast” on certain kinds of stock compensation matters - which increases the denominator used to determine the percentage of votes cast in favor of the proposal - thus creating a higher, and sometimes hard to overcome hurdle for such proposals to be approved.)
• Many proposals – and typically, the most important ones to shareholders in terms of the economic implications – require “a majority of the shares outstanding” – and often of “the total voting power” to be cast in favor of the proposal if there are additional classes of stock outstanding.
• Some proposals – like proposals to change the Bylaws, oust directors or to merge the company – require a “super- majority” - often two-thirds or even more of the shares outstanding to be cast in favor, in order to pass.
• Several “standards” currently exist for electing directors, so it is critically important to know exactly what standard applies: The majority of public companies still have a “plurality standard”, where votes may be “Withheld” from a director, but where there is no opportunity to cast an “Against” vote. Thus, as long as a director gets even one vote “For”, he or she will be elected, unless there is a “proxy fight” with a competing slate. A rapidly growing number of companies have adopted a “majority voting standard” where shareholders get to vote “For”, “Against” or to “Abstain” on the election of each director candidate. (We have been amazed, year after year, to see how many companies that said they had majority voting failed to give shareholders the For, Against and Abstain choices!) While most such companies simply require more “For” votes than “Against” votes for directors to be elected, some require directors to attain a majority of the Quorum, or even a majority of the shares outstanding. Requirements like these are becoming harder and harder to meet with each passing year, as the numbers of abstainers - and nonvoters - have been growing steadily.