(Note: this is an updated and expanded version of a post I first wrote last February)
Counting up the votes from a shareholder meeting is not as easy as one might think.
For starters, there are four different sources that dictate how votes are tabulated: the federal securities laws, the corporation laws of the state in which your company is organized, the rules of the national securities exchanges and the applicable provisions in your charter documents.
On top of that there are five different categories of votes to consider: votes for and against a proposal, broker non-votes, abstentions and withheld votes.
Then there’s the quorum requirement to be met and, finally, the approval threshold for each proposal 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 just about anything in between.
The Categories of Votes
Let’s start off by considering the different categories of votes and how they’re tabulated, in particular let’s look at broker non-votes, abstentions and withheld 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 those shares.
Whether or not a broker has discretionary authority largely depends on the rules of the self-regulatory organization (“SRO”) of which the broker is a member firm (e.g., FINRA, NYSE, Nasdaq, etc.), but can also be influenced by the Securities and Exchange Commission, which oversees the SROs and can require that they adopt rules related to discretionary voting, and by Congress through the legislative process.
Under the SRO rules that are in place now, brokers have discretionary voting authority over routine matters, a common example being the ratification of auditors. However, the rules don’t define what a routine matter is, rather they include an ever-growing but non-exhaustive list of non-routine matters.
For instance, the NYSE recently issued a Information Memo notifying member firms that it will no longer permit discretionary voting on certain corporate governance matters. Examples of these and other matters over which NYSE member firms do not have discretionary voting authority include those that:
- are not submitted to shareholders by means of a proxy statement;
- are the subject of a proxy contest;
- relate to a merger or consolidation;
- involve a right of appraisal;
- authorize the mortgaging of property or creation of indebtedness;
- authorize or create preferred stock or increases the authorized amount of existing preferred stock;
- involve a waiver or modification of preemptive rights;
- change existing quorum requirements with respect to shareholder meetings;
- alter voting provisions or the proportionate voting power of a stock or the number of its votes per share (subject to limited exception); and
- pertain to executive compensation or corporate governance matters, such as the election of directors, the de-staggering of boards, the elimination of supermajority voting requirements, the use of consents, the right to call special meetings and certain types of anti-takeover provision overrides.
To understand how broker non-votes are tabulated, you have to look to the corporation laws of the state in which your company is organized as well as to your charter documents.
In most states broker non-votes are considered present at a shareholder meeting and, as such, are included in the quorum calculation. At the same time, however, broker non-votes are not generally considered entitled to vote, so they have no effect on the outcome of a proposal, unless of course otherwise specified in your charter documents.
An abstention occurs when a shareholder affirmatively chooses not to vote on a proposal.
Under the corporation laws of most states abstentions are considered present and entitled to vote at a shareholder meeting and, as such, are included in the quorum calculation. 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 vote against the proposal.
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 corporation laws of the state in which your company is organized give effect to such a vote (and most don’t).
Under the corporation 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.
Counting Up the Votes
Has the quorum requirement been met?
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. You can modify the default requirement in your charter documents, subject to certain limitations imposed by state corporation laws (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 your 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).
Which adoption threshold is applicable to the proposal in question?
Once a quorum is established, the adoption threshold applicable to each proposal has to be considered and the related votes tabulated and counted.
Let’s look at this in the context of a shareholder advisory vote on executive compensation (a “Say on Pay vote”) and a shareholder advisory vote on the frequency of Say on Pay votes (a “Say on Frequency vote”). Both 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.
Example: Say on Pay Votes
There is no standard under the federal securities laws that establishes when a Say on Pay vote has been adopted. Accordingly, you have to look to the corporation laws of state in which you are organized and to your own charter documents to determine a Say on Pay adoption threshold.
By way of example, if you are a Delaware corporation, unless otherwise provided for in your charter documents, all matters other than the election of directors generally require the affirmative vote of a majority of shareholders present in person or represented by proxy at your shareholder meeting.
Of the companies that held their first Say on Pay votes in 2011 most applied an adoption threshold of either: an affirmative “majority of the votes cast”, with broker non-votes and abstentions having no effect,
or, as in our Delaware example, an affirmative “majority of the votes present” or “present and entitled to vote”, with broker non-votes again having no effect, but this time with abstentions having the same effect as a vote cast against the proposal.
Example: Say on Frequency Votes
As with the Say on Pay vote, there is no standard under the federal securities laws that establishes when a Say on Frequency vote has been adopted, and you must again look to state corporation laws and your charter documents to determine an adoption threshold.
In keeping with our Delaware example, a Say on Frequency proposal will require the affirmative vote of a majority of shareholders present in person or represented by proxy at a shareholder meeting. But how did companies apply a majority voting standard to a Say on Frequency proposal when there are three frequency options for shareholders to choose from: annual, biennial and triennial Say on Pay votes?
Of the companies that held their first Say on Frequency votes in 2011 most resolved this issue by simply adopting a plurality voting position, meaning that they considered the frequency which received the highest number of votes to be the frequency adopted by shareholders. Though nearly a third of companies took the position that an affirmative “majority of the votes cast” was necessary for the adoption of a frequency (with a plurality fall-back position, meaning that if a majority vote was not achieved the option having received a plurality of the votes would be considered the frequency adopted by shareholders).
A Note About Your Proxy Disclosure Requirements
The proxy rules require that you disclosure the voting threshold necessary for approval of all matters submitted to a shareholder vote, other than ratification of your auditors, as well as the method by which votes will be counted, including the treatment and effect of broker non-votes and abstentions under state corporation law and your charter documents. You’d be surprised at how many companies fail to include some or even all of this disclosure in their proxy materials.