More on De-Annualizing the Stockholder Meeting: An Apology and Belated Recognition to Professor Sjostrom

In the recent back and forth on the question of the continued utility of the annual meeting, I’ve been remiss in failing to refer to Professor William Sjostrom Jr.’s article on the subject, “The Case Against Mandatory Annual Director Elections and Shareholders’ Meetings,” which is available here

In reminding me of this article, Professor Sjostrom appropriately laments that it didn’t get a great deal of attention when it was published. This supplemental post is an attempt to remedy that, belatedly, and to suggest that perhaps Professor Sjostrom was just ahead of the rest of us. In any case, I’m glad to join him in focusing on whether the stockholder voting process could be improved.

The “money” lines from Professor Sjostrom’s article, as far as I was concerned, are these:

“There simply is no strong justification for requiring director elections and shareholder meetings annually. Annual elections provide at most a minimal check on management, a check that is not dependent on the frequency of elections. Nor are annual elections critical to the exercise of corporate democracy. Likewise, annual shareholders’ meetings provide little if any opportunity for shareholder deliberation … .”

Evidence Regarding Majority Voting — A Reply to Jim McRitchie

It’s always a treat for a professor to be discussed by a widely read authority, and an especially rare treat to be credited by such a person with saying something clever. So I was pleased to see that Jim McRitchie commented on a couple of my recent postings.

As to the asserttion that I was being “clever,” I respectfully disagree: all I did was present evidence that changing the Delaware default rule for the voting standard in director elections wouldn’t have much formal effect, in light of how frequently Delaware corporations appear to adopt controlling bylaw provisions that make the default standard moot. McRitchie doesn’t challenge this evidence, and I stand on my criticism of the factual assertion that many Delaware corporations adopt the plurality vote standard by default.

More usefully, McRitchie makes the potentially plausible point that a change to the Delaware standard might have an informal impact by encouraging companies to amend plurality vote bylaws and replace that standard with a majority vote standard. That may or may not be so – seems fairly speculative to me – but I didn’t intend to take a position on whether changing the default voting standard would be a good or bad thing. In any event, McRitchie says I’m guilty of “status quo thinking,” which I take to be intended as a pejorative comment. As to that, I have two responses:

First, my post on reframing shareholder voting and potentially eliminating a knee-jerk adherence to having annual shareholder meetings is anything but “status quo thinking;” one could accuse McRitchie of status quo thinking in dismissing my suggestions as wrong ideas, rather than exploring whether reducing the frequency of meetings and voting might be worth it to shareholders if they were given greater power and influence in connection with less frequent meetings.

Second, “status quo thinking” may to some extent simply be a recognition of the reality that some ideas just aren’t in the cards, in any foreseeable future. Example: McRitchie agrees that annual meetings are mostly meaningless, but he partly blames shareholder apathy on the fact that a lot of voting is on merely precatory resolutions. But addressing the meaninglessness of annual meetings by making precatory resolutions mandatory just isn’t going to happen, and shouldn’t. We have a director-centric model of corporate governance, I see no serious support for turning every 14a-8 shareholder proposal into a binding referendum. I suggest that my approach is much closer to the realm of possibility, as long as management and shareholder representatives are willing to recognize that the system could be improved if they both could at least discuss and then maybe agree on acceptable trade-offs that make the shareholder voting system more effective. Those potential trade-offs, by the way, include some sort of enhancement of proxy access.

So, I renew my invitation to McRitchie and other leading corporate governance authorities to explore reforms that offer both management and shareholders (but not necessarily their intermediaries) a better deal. And I reiterate that I’m not suggesting eliminating annual meetings as an isolated, unilateral measure: reducing the extent of shareholder voting depends on management’s willingness to make less frequent voting more meaningful, particularly in relation to the election of directors.

Widener Law’s Professor Hamermesh Gives Keynote Address at the 9th Annual Directors’ Institute on Corporate Governance

Widener University School of Law Professor Lawrence A. Hamermesh recently gave the keynote address at the ninth-annual Directors’ Institute on Corporate Governance in New York City. The Sept. 7 event was presented by the Practising Law Institute.

Hamermesh, Widener’s Ruby R. Vale professor of corporate and business law, directs the school’s Institute of Delaware Corporate and Business Law. His remarks focused on reevaluating the utility of having stockholder meetings every year, and whether less-frequent voting might enhance the quality and impact of stockholder input into corporate governance.

Hamermesh’s appearance was part of a daylong seminar where corporate directors, government officials, corporate attorneys and academics shared perspectives on the regulatory environment surrounding directors in corporate America.

The Practising Law Institute offers programs and publications that serve attorneys and legal professionals in a variety of practice areas.

Hamermesh recently returned to Widener’s Delaware campus after an 18-month leave of absence, where he served as senior special counsel with the Office of Chief Counsel of the Division of Corporation Finance at the Securities and Exchange Commission in Washington, D.C.

Professor Lawrence A. Hamermesh

Professor Lawrence A. Hamermesh

Evidence Relating to the Effect of Prescribing Majority Voting in the Election of Directors as the Default Voting Standard

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).

Professor Conaway on the CML Opinion

From Professor Ann Conaway
Widener University School of Law

In a case of first impression, the Delaware Supreme Court in CML V LLC v. Bax, (Del. Sept. 2, 2011,) has held that creditors do not have derivative standing to bring a fiduciary duty claim against present or former managers of an insolvent Delaware LLC under statutory provisions of the Delaware Limited Liability Company Act (DLLCA). The statutory preclusions on which the Supreme Court relied are found at 6 Del. Code §§ 18-1001-1002. In its opinion, the Delaware Supreme Court set forth the language of § 18-1002, stating that: “the plain language [of the statutory provisions] is unambiguous and limits derivative standing to “member[s] or assignee[s]” and that exclusive limitation is constitutional.” (Emphasis in the original). Indeed, § 18-1002 defines a “Proper plaintiff” as: “ In a derivative action, a plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action….” (Emphasis added)
CML had entered a loan transaction with JetDirect at a time when the company’s finances were uncertain and the company’s financial situation somewhat unclear. However, CML was always free to contract for any terms it desired if greater financial security was sought. Shortly after the loan agreement by CML, JetDirect became insolvent and failed to pay CML. CML brought suit in the Court of Chancery for derivative and direct claims, including breach of the duty of care. The Court of Chancery dismissed the derivative claims and the case was appealed to the Delaware Supreme Court.
On appeal, the Vice Chancellor’s interpretation of DLLCA §§ 18-1001-1002 was disputed. In addition, counsel for CML argued that the Vice Chancellor’s interpretation rendered the statutory provisions of DLLCA unconstitutional on the grounds that they stripped the Court of Chancery of its traditional power to do “equity.” The Supreme Court quickly disposed of the constitutionality argument on the basis that the equitable derivative suit for stockholders from English common law was grounded in corporate – not LLC law. The Supreme Court continued that the Delaware General Assembly was free to legislate exceptions from the common law and did so with the enactment of the DLLCA in 1992.
The Supreme Court’s opinion in CML v. Bax is a beacon of hope for the law of Delaware unincorporated entities for its uncontroverted stance in line drawing between Delaware corporations and LLCs. In this opinion, the Supreme Court refuses, through the doctrine of equity, to infuse corporate principles into Delaware’s unambiguous, contractually based alternative entity statutes. With this opinion comes greater clarity and lower agency costs in the law of Delaware LLCs. Hopefully, the opinion will serve as a harbinger for the abandonment of corporate principles to define the rights of members, managers and other parties to a Delaware operating agreement. Five stars to the Delaware Supreme Court!

Too Busy to Think, Spread Too Thin to Matter: Why Stockholder Voting Should be Less Frequent, More Targeted, and More Thoughtful

I spoke two days ago at the 9th Annual PLI Directors’ Institute on Corporate Governance. Lots of great presentations and provocative suggestions at this event, from such luminaries as Bill Ackman, Ira Millstein, Hillary Sale, Pat McGurn, Richard Parsons, Alan Beller and lots of others. In my comments which you can find in this PDF, I asserted that stockholder meetings are too frequent and involve too many votes on too many items. Stockholder input into corporate governance is cheapened as a result, and would be more valued and valuable if voting were more selectively scheduled and targeted. Managers and investors share a common interest in having their governance dialogue include discussion of how to better focus stockholder voting and eliminate elections and resolutions that have little or no economic significance. State laws compelling the annual holding of stockholder meetings should become more flexible, but are unlikely to do so unless both management and stockholder representatives support that evolution.

Random Thoughts on Proxy Access and Judicial Review

sclaesOfJusticeDarkLawrence A. Hamermesh
Ruby R. Vale Professor of Corporate and Business Law
Widener University School of Law, Wilmington, Delaware

On July 22, while I was vacationing and enjoying relatively cool temperatures in northern Maine, the District of Columbia Court of Appeals, suffering in Washington’s heat and humidity, issued an opinion invalidating Rule 14a-11, which the Securities and Exchange Commission had adopted about a year earlier.

Now that I’m back in the office and have had a chance to reflect on the Court of Appeals’ opinion, I can only begin to describe how mixed my feelings are on this whole subject.  On one hand, I was involved with the preparation of the rule while employed with the Commission Continue reading

Court of Chancery Deals a Blow to Use of “Pfizer Type” Majority Voting Policies as a Mechanism for Shareholder Activism

Prof. Lawrence A. Hamermesh
Ruby R. Vale Professor of Corporate and Business Law

In a very interesting opinion on a matter of first impression, Vice Chancellor John Noble has indicated that the refusal of a board of directors to accept the resignation of a director who fails to obtain a majority vote under a “Pfizer-style” majority vote resignation policy is largely immune from judicial review. Continue reading