CDF E-Alerts



"Majority Vote to Elect Directors"
 
July 6, 2005

A current “hot topic” in corporate governance discussions is a proposal to change the existing “plurality” voting to “majority” voting to elect directors. Delaware General Corporation Law, Section 216(3) provides that the directors who receive the most “for” votes (even if only one vote) wins, not withstanding the fact that a majority of votes cast might have voted to “withhold” or have abstained from voting. The corporate laws in California and most other states have similar provisions. Whether or not applicable state corporate law is revised in the future, each individual corporation has the power and authority to establish a higher level of vote for electing its directors. Any such new requirements could be added to the company’s incorporation documents and/or bylaws. Voices in the corporate governance arena are advocating that the corporate entity adopt changes to its corporate documents, such as:
  1. A Director is elected by the affirmative vote of the majority of all votes cast; or
  2. If the majority of the votes cast are to “withhold” vote for a particular Director, the Director is required to submit his resignation to the Board, with the Board then having the discretion to decide whether to accept the resignation or to retain the Director on the Board (policy adopted by Pfizer); or
  3. If a majority of the company’s outstanding shares (not just a majority of those shares who do in fact vote) vote to withhold vote for a particular Director, then the Director is not elected.

This topic is being considered by the (i) Council of Institutional Investors, (ii) Committee on Corporate Laws of the American Bar Association, SEC, ISS, etc. As there are legitimate arguments on both sides of this issue for changing the method for electing directors, or for retaining the status quo, this topic will likely be hotly debated over the next several months.

Provided By:
Knox Bell
DLA Piper