Prof. Lawrence A. Hamermesh
Ruby R. Vale Professor of Corporate and Business Law
Widener University School of Law, Wilmington, Delaware
[Professor Hamermesh is a member of the Delaware State Bar Association’s Council of the Corporation Law Section (the “Delaware Council”). Nevertheless, nothing stated here represents the views of that group.]
On August 11, 2011, the Council of Institutional Investors (“CII”) requested that the Delaware Council promote the revision of the Delaware General Corporation Law (“DGCL”) to alter the default rule governing the required vote in the election of directors. Specifically, CII asks that the default rule – currently that a plurality vote is sufficient to elect directors – be amended to require some form of majority vote, at least in the absence of a contested election. (CII’s letter was published on its web site more or less concurrently with its submission to the Delaware Council, and is available here).
In its letter, CII asserts that “many corporations incorporated in Delaware adopt the plurality voting standard by default.” This is an empirically testable assertion: to “adopt the plurality voting standard by default,” a company’s bylaws would have to be silent on the question of the required vote to elect directors. If the bylaws prescribed a voting standard (either the plurality standard or some form of majority vote standard), the default rule under Section 216 of the DGCL would be displaced and would not control. The bylaws, and not the statutory default provision, would prescribe the voting standard.
It therefore seemed appropriate to evaluate whether and to what extent Delaware public company bylaws actually do or do not prescribe a voting standard for electing directors. Because of CII’s focus on smaller public companies that have not adopted majority voting bylaws, I (with the assistance of George Codding, Widener Law ‘2012) examined a sample of 150 Delaware companies in the Russell 2000 small cap index. 142 of the 150 companies in that sample (95%) have bylaws prescribing a voting standard.
This result comes with one caveat. 21 of the 150 sampled companies (14%) have a bylaw provision to the effect that a majority in interest of the combined voting power of the issued and outstanding shares of stock entitled to vote represented at the meeting shall decide any question or matter brought before such meeting. Because of their typical comprehensiveness (governing votes on “all matters” or “all actions” subject to stockholder vote), I would be inclined to interpret such a provision as defining a general voting standard applicable in all voting situations, including the election of directors, absent some specific provision requiring a different standard for the election of directors. There are arguments to the contrary, however, which, if successful, would leave the statutory default standard to govern director elections, and would result in an amendment to that standard having a somewhat greater formal impact.
On balance, the information generated from our review indicates that, contrary to CII’s assertion, very few Delaware public companies – and certainly not “many” – “adopt the plurality voting standard by default.” Thus, in the large majority of Delaware companies, a change in the default rule governing the required vote to elect directors would have no formal effect at all. Barring a statutory amendment mandating some form of majority vote standard (rather than merely prescribing that standard as a default), any change in the voting standard in most of the sampled companies would have to arise through amendments to the governing bylaw provisions. Such amendments can be accomplished by unilateral stockholder vote under the DGCL, and adoption of a bylaw prescribing a majority vote standard precludes subsequent amendment by the directors (DGCL Section 216).