Shareholder Voting | Holger Spamann | December 07, 2017


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Shareholder Voting

Original Creator: Holger Spamann Current Version: Holger Spamann Show/Hide

Shareholders vote to elect the board and to approve fundamental changes, such as charter amendments (cf. DGCL 242(b)) or mergers (cf. DGCL 252©). Other matters may be submitted to a shareholder vote.

“Shareholder democracy”

Shareholder voting is often labeled “shareholder democracy.” It differs considerably, however, from political elections in contemporary democracies such as the U.S.

First, the default rule in corporations is one vote per share (“one share one vote”), rather than one vote per shareholder (cf. DGCL 212(a)).

Second, voting rights are determined on the “record date,” 10-60 days before the actual vote (DGCL 213). At least in practice, one keeps one’s voting rights even if one sells the shares in between. (Any problem with this?)

Third, incumbents enjoy a large advantage. They control the voting process, and the corporation pays for their campaign.

Fourth, rational apathy is more pronounced in shareholder voting than in (national) political elections. In large corporations with dispersed ownership, an individual small shareholder has practically no influence on the outcome. It is thus rational for the shareholder not to spend time and resources learning about the issues at stake (“rational apathy”). So-called institutional investors such as pension funds or mutual funds might have more influence but their decision-makers lack the incentive to use it: The decision-makers are the funds’ managers, but the benefits of higher share value accrue primarily to the funds’ beneficiaries. (You might think that a fund manager benefits indirectly by attracting more new customers if the fund generates a higher return for existing customers. This is true for some idiosyncratic funds. But many funds, particularly index fund, invest in the same assets as their competitors and are evaluated relative to one another. The only way such funds can distinguish themselves from their competitors is through lower cost. For these funds, spending resources on voting hurts their competitive position relative to passive competitors even if the voting does lead to higher asset values.)

Voting rules and frequency

Unless otherwise provided in the charter or the statute, a majority of the shares entitled to vote constitutes a quorum (DGCL 216.1), and the affirmative vote of a majority of the shares present is required to pass a resolution (DGCL 216.2). The default for director elections is different (plurality voting, DGCL 216.3), but most large corporations have instituted some form of majority voting rule for director elections as well. This matters mostly when shareholders express their dissatisfaction through a “withhold campaign” against a particular director. Under the default rule, the director could be elected with a single vote (if running unopposed, as is the norm).

A more radical but rare deviation from the default rule is cumulative voting. See DGCL 214 for the technical details. Roughly, cumulative voting ensures proportional representation. Cf. eBay v. Newmark later in the course.

The corporation must hold a stockholder meeting at least once a year, DGCL 211(b). By default, all board seats are up for election every year. Under DGCL 141(d), however, the charter or a qualified bylaw can provide that as few as one third of the seats are contestable each year, i.e., that directors hold staggered terms of up to three years. This so-called “staggered board” probably seems like technical minutiae to you now. But it turns out to be an extremely important provision because it may critically delay anybody’s attempt to take control of the board. We will first see this in Blasius. An important complementing rule is that unlike standard boards, staggered boards are subject to removal only for cause (DGCL 141(k)(1); cf. DGCL 141(k)(2) for the case of cumulative voting).


In principle, shareholders still vote at a physical “meeting” (but see the possibility of action by written consent, DGCL 228). But in large corporations, few shareholders attend such meetings in person, and those who do may not be the most important ones. Instead, shareholders vote by mail — sort of. U.S. corporations do not mail shareholders a proper ballot. Instead, the board solicits “proxies” on behalf of, and paid by, the corporation. Shareholders “vote” by granting or withholding proxies, and by choosing between any options that the proxy card may provide.

A proxy is a power of attorney to vote a shareholder’s shares (cf. DGCL 212(b) — see sample card here (2nd last page)). The board solicits proxies on behalf of the corporation to ensure a quorum, to prevent a “coup” by a minority stockholder, and because the stock-exchange rules require it (see, e.g., NYSE Listed Company Manual 402.04). The board decides which proposals and nominees to include on the corporation’s proxy card, with the exception of SEC proxy rule 14a-8, which allows shareholders to submit certain proposals for the corporation’s proxy card (see below). The corporation pays.

Occasionally, “insurgents” solicit their own proxies in opposition to the incumbent board, usually in order to elect their own candidates to the board. This is called a proxy fight. Outside the takeover context, however, proxy fights are very rare. Shareholders face a considerable collective action problem. The soliciting shareholder bears the entire cost of the solicitation, while receiving only a fraction of any benefit created.

This explains why it is so important who or what gets onto the corporation’s proxy card. If it’s not on the corporation’s card, it won’t receive any votes at the meeting, even if properly moved during the meeting. As far as the board is concerned, that’s not a problem. They’ll put onto the corporation’s card whatever resolution and candidate they support. By contrast, challengers must rely on the law to get their proposals onto the corporation’s card, otherwise boards happily reject the challengers’ proposals. The “Proxy Access” section below deals with this question directly.

The federal proxy rules

Proxy solicitations are heavily regulated by the SEC’s proxy rules (Regulation 14A promulgated under section 14 of the Securities Exchange Act). As a result, the rules of corporate voting in the U.S. are a complicated interaction of federal proxy rules, state law, and a corporation’s bylaws and charter.

The federal proxy rules are tedious. I provide a guide at For a first course on corporations, you only need to know the following:

1. Before any proxy solicitation commences, a proxy statement must be filed with the SEC (rule 14a-6(b)). In contested matters, a preliminary proxy statement must be filed 10 days before any solicitation commences (rule 14a-6(a)).
2. The content and form of the proxy materials are heavily regulated (rules 14a-3, – 4, and – 5, and Schedule 14A). Virtually everything you see in an actual proxy statement is prescribed by the rules.
3. “Proxy” and “solicitation” are defined extremely broadly (rule 14a-1(f) and (l)(1)). Accordingly, the sweep of the proxy rules is very wide. In fact, in the past, the proxy rules impeded even conversations among shareholders about their votes. Certain exceptions to the definitions (particularly rule 14a-1(l)(2)(iv)) or requirements (particularly rules 14a-2(a)(6) and 14a-2(b)(1)-(3)) are therefore extremely important — you should read them.
4. Rule 14a-8 is the only federal rule requiring corporations to include shareholder proposals in the corporation’s proxy materials. Under the rule, corporations must include in their proxy certain precatory resolutions and bylaw amendments sponsored by shareholders. By contrast, the rule does not cover director nominations or anything else that would affect “the upcoming election of directors” (see official note 8 to paragraph (i) of the rule). You should read the rule — unlike the rest of the proxy rules, it’s written in plain English.
5. There is a special anti-fraud provision (rule 14a-9).

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  1. 1 Show/Hide More Schnell v. Chris-Craft Industries, Inc. (Del. 1971)
    Original Creator: Holger Spamann Current Version: Holger Spamann
    Schnell is the classic Supreme Court authority emphasizing the importance of corporate voting, and announcing special judicial vigilance towards anything that interferes with this voting. Pay close attention to the legal reasoning. Is it compelling? We will come back to this often.
  2. 2 Show/Hide More Blasius Industries, Inc. v. Atlas Corp. (Del. Ch. 1988)
    Original Creator: Holger Spamann Current Version: Holger Spamann

    Blasius is the classic Chancery Court decision applying, and expanding on, Schnell. What exactly does Chancellor Allen have to say about corporate voting— what is it about voting that is important? Does Allen’s discussion of voting, its importance, and its judicial treatment matter for the ultimate outcome of the case here? If not, why would he have bothered?

    As always, also pay attention to what is going on in the underlying business dispute: Is this a normal vote taken at a meeting? What did the board do to frustrate the vote, and why would that work?

    I edit this case more than usual because it involves M&A issues and terminology that we will only learn later in the course. For present purposes, it is enough to understand that Blasius attempted to get its people elected to the Atlas board, and that Atlas's management did not like this at all.


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December 07, 2017

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