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The Anatomy of a Shareholder Vote Calculation

Shareholder Meeting - Tabulating and Calculating Votes

(Note: I’ve since updated this post here)

Counting up the votes from a shareholder meeting is not as easy as one might think.

First off, there are four different sources that dictate how the votes are tabulated: the federal securities laws, the corporate laws of the state in which a company is organized, the rules of the national securities exchanges and a company’s charter documents.

On top of that there are five different categories of votes to consider: votes for and against a proposal, which are self-explanatory, broker non-votes, abstentions and withheld votes (more on these latter three in a second).

Then there’s a quorum requirement to be met, and, finally, the approval threshold for each proposal has to be considered, which can range from a plurality of the votes cast to a super majority of the votes present and entitled to vote, and anything in between.

Broker Non-Votes

A broker non-vote occurs when a broker has not received voting instructions from the beneficial owner of shares held in street name and the broker does not have, or declines to exercise, discretionary authority to vote the shares. Brokers only have discretionary authority to vote uninstructed shares on routine matters, such as the ratification of a company’s auditing firm.

Under the laws of most states broker non-votes are considered present at a meeting, and, as such, are included in the calculation of whether a quorum exists, however, they are not considered entitled to vote, and so have no effect on the outcome of a proposal.

The Dodd-Frank Changes to Broker Non-Votes

Following enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, national securities exchanges were required to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and other significant matters as determined by the rules of the Securities and Exchange Commission.

In September 2010, the Commission approved amendments to New York Stock Exchange Rule 452, and corresponding Section 402.08 of the Listed Company Manual, and Nasdaq Stock Market Rule 2251, to implement the Dodd-Frank Act’s requirements. At present, the Commission anticipates proposing rules to define “other significant matters” sometime between April and July of 2011.

Among other things, the NYSE and Nasdaq Dodd-Frank-imposed rule changes have added uncontested director elections (formerly considered a routine matter), shareholder advisory votes on executive compensation and shareholder advisory votes on the frequency of advisory votes on executive compensation to the category of non-routine matters.

It is also worth noting that these rule changes relate to NYSE and Nasdaq member firms, not to the companies whose securities are listed on the NYSE or Nasdaq markets, so the changes effect all companies, even those with securities quoted in over the counter markets like the OTC Bulletin Board and the reporting tiers of the OTC Pink Markets.

Abstentions

An abstention occurs when a shareholder affirmatively chooses not to vote on a proposal.

Under the laws of most states abstentions are considered present and entitled to vote at a meeting, and, as such, are included in the calculation of whether a quorum exists. However, abstentions are not generally considered votes cast, meaning that where a proposal requires the approval of “a majority of the votes cast” abstentions will have no effect, but, where a proposal requires the approval of “a majority of the votes present” or “a majority of the votes present and entitled to vote” abstentions will have the same effect as votes cast against the proposal.

Withheld Votes

A withheld vote is a category of vote that has come about as a result of the Commission’s proxy rules.

Securities Exchange Act Rule 14a-4 requires that a proxy for the election of directors include an option for shareholders to withhold authority to vote for a director nominee.  The rule does not, however, require that a proxy include an option for shareholders to vote against a director nominee, unless the laws of the state in which the company is organized give effect to such a vote (most don’t).

Under the laws of most states directors are elected by a plurality vote, meaning that the director nominee receiving the highest number of votes, regardless of the number of votes withheld, is elected (i.e., a  director nominee can receive 1 for vote, while 999 votes are withheld, and still be elected).  As a consequence, over the last half dozen or so years, companies have started to amend their charter documents and implement governance policies to give effect to withheld votes.  For example, one approach has been to require a director to tender their resignation, which may or may not be accepted, if they receive a greater number of withheld votes than for votes.  Another approach has been to simply adopt a majority voting standard for the election of directors.

Tallying it All Up

Has the quorum requirement been satisfied?

Before any business can be transacted at a shareholder meeting there must be a quorum present.

By default most states define a quorum as the presence of a majority of the shares entitled to vote in person or by proxy.  A company can modify the default requirement in its charter documents, subject to certain limitations imposed by state law (e.g., in Delaware a quorum cannot be less than one-third of the shares entitled to vote) and by the rules of the exchange on which the company’s securities are listed (e.g., Nasdaq requires a quorum of at least 33.33% of a company’s outstanding common voting stock; NYSE generally requires a quorum of not less than a majority of a company’s outstanding shares).Quorum Requirement - Shareholder MeetingOnce it is established that a quorum exists, the approval thresholds applicable to each proposal have to be considered and the related votes tabulated and counted. Let’s look at this in the context of the shareholder advisory vote on executive compensation and the shareholder advisory vote on the frequency of advisory votes on executive compensation.  Remember these are non-routine matters for which brokers do not have discretionary voting authority, so shares represented by broker non-votes count as present for purposes of establishing a quorum but not as shares entitled to vote on the proposals.

What approval threshold is applicable to the shareholder advisory vote on executive compensation?

There is no approval threshold required for the shareholder advisory vote on executive compensation.  As of this writing, of the companies that have reported results for their advisory votes on executive compensation, most have considered the proposal approved if it received the affirmative vote of a majority of the shares present and entitled to vote, with abstentions having the same effect as a vote cast against the proposal, though in three instances companies have specified that both abstentions and broker non-votes have the same effect as votes cast against the proposal.

Shareholder Meeting Vote

Most of the remaining companies have considered the proposal approved if it received the affirmative vote of a majority of the votes cast, with abstentions having no effect.Shareholder Meeting VoteIn a few cases companies have not disclosed an approval threshold at all, though in each a majority of the shares present and entitled to vote did approve the proposal.

What approval threshold is applicable to the shareholder advisory vote on the frequency of advisory votes on executive compensation?

There is no approval threshold required for the shareholder advisory vote on the frequency of advisory votes on executive compensation. However, if a company wishes to exclude certain shareholder proposals that seek advisory votes on executive compensation or that relate to the frequency of advisory votes on executive compensation, then its shareholders must approve a single frequency choice by a majority of the votes cast, with abstentions having no effect, and the company must adopt a policy that is consistent with that shareholder choice.

As of this writing, of the companies that have reported results for their advisory votes on the frequency of votes on executive compensation, most have considered the frequency receiving a plurality of the votes cast as the frequency approved by shareholders.  Though, there have been a handful of companies that have considered the frequency receiving a majority of the votes cast as the frequency approved by shareholders. If companies in this latter group then adopt policies that are consistent with their shareholders’ vote, they may exclude future shareholder proposals related to advisory votes on executive compensation or the frequency of advisory votes on executive compensation.

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  • Anonymous March 2, 2011, 6:29 AM

    Can we assume that if broker non-votes are not allowed for quorum then they are not allowed for both discretionary and non-discretionary?

    Reply
    • Vanessa Schoenthaler March 2, 2011, 4:50 PM

      Not necessarily. It depends on why the broker non-votes are not being counted as “present” for purposes of determining whether the quorum requirement has been met. For example, is it because of a state law requirement or because of something in the company’s charter documents? The treatment of broker non-votes should be addressed in the company’s proxy materials.

      Reply
  • Ellenseng89 November 22, 2011, 9:34 AM

    i want ask some questions.. please do help me.. why have voters and non voters during first meeting of incorporation of private company

    Reply
    • Vanessa Schoenthaler November 22, 2011, 7:25 PM

      I’d be happy to help, but I’m not sure what you mean by having voters and non-voters during the first meeting of incorporation. Could you describe the scenario in a little more detail (or perhaps provide a hypothetical example)? If you’re referencing something that I mentioned in the post you could also refer me back to the section you’re looking at.

      Thanks,

      ~Vanessa

      Reply
  • James McRitchie July 12, 2012, 6:51 PM

    You forgot one category, “blank votes” on a voter information form (VIF), commonly used by retail shareowners. These turn into votes as recommended by management. See http://blogs.law.harvard.edu/corpgov/2009/06/02/dont-let-companies-change-shareholders-blank-votes/

    Reply
    • Vanessa Schoenthaler July 12, 2012, 8:02 PM

      Thanks James, I plan to update this post again or do a more in depth post on other aspects of shareholder voting and include blank votes. Your HLS blog post does a good job of explaining the issue though.

      Reply
  • Miriam Schartz-Ziv May 26, 2013, 4:24 AM

    Thank you for this very good explanation. Could you explain please in which cases companies
    calculate the votes on a base of for/ (for + against) vs. for/ (for + against + abstain)
    vs. for/ outstanding. I understand it has something to do with state law, but would like to know a bit more about this.

    Thanks!

    Reply
  • Anonymous says:

    Can we assume that if broker non-votes are not allowed for quorum then they are not allowed for both discretionary and non-discretionary?

    • Not necessarily. It depends on why the broker non-votes are not being counted as “present” for purposes of determining whether the quorum requirement has been met. For example, is it because of a state law requirement or because of something in the company’s charter documents? The treatment of broker non-votes should be addressed in the company’s proxy materials.

  • Ellenseng89 says:

    i want ask some questions.. please do help me.. why have voters and non voters during first meeting of incorporation of private company

    • I’d be happy to help, but I’m not sure what you mean by having voters and non-voters during the first meeting of incorporation. Could you describe the scenario in a little more detail (or perhaps provide a hypothetical example)? If you’re referencing something that I mentioned in the post you could also refer me back to the section you’re looking at.

      Thanks,

      ~Vanessa

  • […] Schoenthaler on February 13, 2012 Tweet(Note: this is an updated and expanded version of a post I first wrote last […]

  • You forgot one category, “blank votes” on a voter information form (VIF), commonly used by retail shareowners. These turn into votes as recommended by management. See http://blogs.law.harvard.edu/corpgov/2009/06/02/dont-let-companies-change-shareholders-blank-votes/

  • Miriam Schartz-Ziv says:

    Thank you for this very good explanation. Could you explain please in which cases companies
    calculate the votes on a base of for/ (for + against) vs. for/ (for + against + abstain)
    vs. for/ outstanding. I understand it has something to do with state law, but would like to know a bit more about this.

    Thanks!