Corporate Governance, AIG and the Obama Administration: The Meaningless of Majority Vote Provisions

Imagine a shareholder who owns 80% of a company but can't get effective control of the board of directors.  That would describe the situation in place now with respect to the government and AIG.  How so? 

The federal government owns almost 80% of AIG's voting power.  The authority to vote the shares has been placed in the hands of three trustees.  Nonetheless, this does not ensure that defeated directors will actually leave office.  AIG, as a Delaware corporation, requires that directors who do not receive a majority submit an irrevocable letter of resignation.  The board, however, has the authority to reject these resignations. As AIG provides in its corporate governance guidelines:

• Voting for Directors. The Board shall nominate for election as directors only incumbent candidates who have tendered, prior to the mailing of the proxy statement for the annual meeting at which they are to be re-elected as directors, irrevocable resignations authorized by Section 141(b) of the Delaware General Corporation Law that will be effective upon (i) the failure to receive the required vote at any annual meeting at which they are nominated for re-election and (ii) Board acceptance of such resignation. . . . The Board shall accept such resignation unless it determines that the best interests of the Corporation and its shareholders would not be served by doing so.

This is in contrast to the somewhat inconsistent reference in the bylaws which cross references the guidelines but merely notes that directors "shall be elected by the vote of the majority of the votes cast."  Even if the government votes against some of the directors, they will remain on the board if the other directors do not accept their letter of resignation.

Of course, if the board does accept their resignation it doesn't get shareholders (including the government) much.  Their resignation creates a vacancy.  Who gets to fill it?  The remaining directors on the board.  See The Corporate Governance Guidelines ("In the event that a vacancy on the Board is created for any reason, and it is determined by the Nominating and Corporate Governance Committee that the vacancy is to be filled, the Nominating and Corporate Governance Committee will consider the views of interested shareholders, as it is deemed appropriate.").

Perhaps given this, the government (as the 80% shareholder) might run a competing slate of directors.  In that case, the process operates not under a majority but a plurality vote system.  Those directors who get the highest number of votes will win which would mean the government nominated directors.  Unfortunately for the government, AIG has an advance notice bylaw (see section 1.12 of the bylaws) that more or less requires a shareholder to submit nominees to the board at least 90 days before the meeting.  As a result, the government is out of luck.  Any attempt to nominate directors would be out of order.

The only hope for the government would be the cumbersome process of calling a special meeting and electing a new board.  For this, AIG was unprepared, at least with respect to an 80% shareholder.  Delaware provides that shareholders may call a special meeting and that the percentage may be included in the bylaws or the articles.  See Del. C. Section 211(d) ("Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.").  AIG has set the bar at 25%, a percentage more or less impossible for shareholders to meet in ordinary times, effectively eliminating the right.  But these are not ordinary times and the government in fact owns enough shares to call a special meeting.

Were this an MBCA jurisdiction, the ability to call a special meeting might hardly matter.  The MBCA allows companies to restrict the shareholder right to remove directors so long as the provision is in the articles of incorporations.  See § 8.08(a) REMOVAL OF DIRECTORS BY SHAREHOLDERS ("The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be removed only for cause.").

Under Delaware law, however, directors may be removed by shareholders with or without cause.  See Del. C. Section 141(k).  Of course, there are exceptions and one of them is a staggered board.  In that case, directors can only be removed for cause.  Id.  Moreover, some companies have attempted to limit this removal authority by raising the percentage of votes necessary to replace the board.  See Beal Bank v. Westpoint, 2007 Del. Ch. LEXIS 77 (Ch. Ct. May 30, 2007)(noting that company adopted requirement "requiring a two-thirds supermajority stockholder vote to remove any director—even for cause; a corporation has the right to restrict the ability to remove directors.").  

AIG does not have a supermajority provision, nor does it have a staggered board.  See AIG Articles (this is the only version that we could find online).   The bylaws specify that the shareholders have this authority.  See AIG Bylaws, Section 2.2 ("Any director or the entire Board of Directors may be removed, with or without cause, by the affirmative vote of holders of a majority of the shares then entitled to vote at an election of directors; and any vacancy so created may be filled by the affirmative vote of holders of a majority of the shares then entitled to vote at an election of directors."). 

Thus, the 80% shareholder, in this case, the Government, could replace the board if it went through the cumbersome process of nominating a slate, meeting the requirements of the advance notice bylaw, and requesting that a special meeting be convened.  Moreover, had AIG been better prepared (having a staggered board in place, for example), it could have nullified even this avenue, effectively denying an 80% shareholder any significant say in the management of the company.

Comments

[J. Robert Brown]

We received the following comment on the post:

Delaware General Corporation Law §228 states that unless the certificate of incorporation provides otherwise, stockholders can act by written consent. AIG's Restated Certificate of Incorporation does not limit the ability of stockholders to act by written consent.

In other words, the Government, which owns 25% of the stock, can also replace the board by a consent solicitation. Calling a special meeting is not the only way.