Majority Voting Requirements and Pyrrhic Victories

One of the most rapid shifts in corporate governance has been the side spread shift to majority rather than plurality voting for directors.  Plurality voting, still the common rule in US corporate law, allows directors to win as long as they are the recipients of the highest number of votes.  Because the typical case is that only management runs a slate of directors, this is always the case.   In these systems, no votes (more accurately withhold votes) don't count.

This state of affairs has been upended by shareholder proposals that effectively call for majority vote.  Candidates need to obtain a majority of the votes cast.  In those circumstances, no votes count.  Public companies have rapidly implemented majority vote provisions and most of the Fortune 500 now have them in place. 

Does this suddenly reflect a change of attitude in the board room?  Not really.  By having management put in place a majority vote bylaw rather than have it forced on them through a shareholder proposal, management controls the drafting process and can ensure that the provision lackes meaningful teeth.  How might this occur?  By putting in place a bylaw that requires directors who do not receive a majority to resign but leave to the board the discretion whether or not to accept the resignation.  Were shareholders writing the bylaw, the resignation would likely be irrevocable, something permitted under Delaware law.

Which brings us to Kistefos AS v. Trico Marine Services.  A shareholder sought to submit a proposal that would require majority voting for directors, with those defeated required to immediately exit the board.  As the proposal stated:

• A Person shall be ineligible to serve as a director if such person fails to receive the number of votes required to elect directors at any meeting of stockholders at which such person is to be elected . . . . The term of any existing director of the Corporation who fails to receive the number of votes required to re-elect such existing director at any meeting of stockholders at which such existing director is nominated to be re-elected . . . shall immediately expire, and a vacancy in the Board of Directors shall be deemed to exist.

The Company rejected the proposal as inconsistent with, "among other things, the provisions of Trico’s certificate of incorporation and §§ 141(b) and (k) of the Delaware General Corporation Law."  Article 5 of the certificate of incorporation requires a staggered board and provides that directors shall serve "until their respective successors shall have been duly elected and qualified." Article 141(b) provides that each "director shall hold office until such director's successor is elected and qualified or until such director's earlier resignation or removal."

In other words, the two provisions allow the defeated director to hold over.  On the other hand, Article 141(b) provides that "A resignation which is conditioned upon the director failing to receive a specified vote for reelection as a director may provide that it is irrevocable."  The statute, therefore, expressly contemplates situations where the director will in fact not hold over.

The ruling of the court?  Not to rule.  Rather than provide expedited treatment, Chancellor Chandler allowed the proposal to be put to shareholders, with the legal issues reserved should the provision pass.  In effect, this was a victory for the company.  What the Chancellor should have done was rule unequivocally that shareholders have a right to vote on the establishment of a majority vote standard and that this proposal was consistent with Delaware law. 

The case suggests that the courts in Delaware are not supportive of these provisions and efforts.  But we already knew that.  Moreover, the case illustrates that the Delaware approach to majority voting (the directors are elected but can submit an irrevocable letter of resignation) will only generate more litigation to the disadvantage of shareholders (forcing them to absorb the expense, management as always allowed to rely on the corporate treasury). 

The spread of majority voting provisions is a Pyrrhic victory.  The appropriate standard is to legislatively command the practice, with directors who do not receive a majority defeated and never allowed to take office.  In other words, pretty much what the shareholder in this case requested.

The opinion, complaint and other primary materials can be found at the DU Corporate Governance web site.