Corporate Governance

Access and Its Opponents: The Ostensible Evidence of Majority Voting Provisions

By J. Robert Brown

One of the main arguments made in opposition to access has been the widespread adoption of majority vote provisions.  Somehow, the evidence implies, access will undergo something similar and, in the corporate governance realm, a thousand access flowers will bloom.  In fact, this is almost certainly wrong and misstates the reasons why majority vote provisions have become "widespread" in their adoption.

The use of majority voting as evidence is misguided for a number of reasons.  Almost everyone using the evidence overstate their popularity.  They typically refer to the percentage of companies in the S&P 500 or Fortune 500 that have adopted these provisions.  While it may be true that they have been broadly implemented among the largest companies, they are far less common among smaller public companies. According to Directorship, for example, around 75% of the companies in the Russell 3000 still use straight plurality voting.

Second, and more importantly, the popularity of these bylaws is no doubt due in large part to the lack of any meaningful authority extended to shareholders.  The most common models of majority voting merely require that nominees not receiving a majority of votes submit a letter of resignation. Boards may reject the letter and, in fact, have done so on a number of occasions, effectively overturning the decision of shareholders.  Our posts on the Axcelis litigation illustrate the point and the difficulty incurred by shareholders in trying to learn all of the facts surrounding the decision.

Even if a bylaw were to require resignation, with no residual discretion given to the board, shareholders still have no real authority. Any vacancy that results from the defeat of a director will be filled by the board. The board can, if it wants, fill the position with the very director who did not receive a majority of the votes cast.  See Commentary to Section 10.22 of the Model Business Corporation Act ("In the exercise of its power under Section 10.22(a)(2), a board can select as a director any qualified person, which could include a director who received more against than for votes.").

Because of this lack of real authority for shareholders, majority vote provisions have been labeled on this Blog as a 'myth.'[15] Other commentators have described them as 'smoke and mirrors.' William K. Sjostrom, Jr. & Young Sang Kim, Majority Voting for the Election of Directors, 40 Conn. L. Rev. 459, 487 (2007).

Access proposals, in contrast, are not illusory. They provide shareholders with meaningful and substantive rights. They allow shareholders to insert nominees in the company's proxy statement, increasing the likelihood that the candidates will be elected. Management has no discretion to ignore the results or otherwise fill the board position. Boards can, therefore, be expected to vigorously oppose these bylaws, as has been the case so far.

For the complete letter filed by this Blog with the SEC on the access proposal, go here. For a history of access, go here.

Full post as published by The Race to the Bottom on August 27, 2009 (boomark / email).