The Council of Institutional Investors has adopted what it describes as “a comprehensive body of corporate governance best practices”, including Policies on Corporate Governance. I question, however, whether some of these policies really are “best practices” or even in conformity with applicable law.
For example, the Section 3.7 of the CII’s Policies on Corporate Governance unequivocally, and without exception, states: “Uninstructed broker votes and abstentions should be counted only for purposes of a quorum.” On closer inspection, however, this so-called “best practice” may be neither legal nor in the best interests of shareholders.
Not counting abstentions may violate state law. In many cases, state law gives effect to abstentions. For example, in the case of amendments to the articles of incorporation, Section 902(a) of the California General Corporation Law generally requires the approval of the outstanding shares. That standard is defined in Section 152 as “the affirmative vote of a majority of the outstanding shares entitled to vote.” This means that abstentions will in effect be treated as “no” votes. Section 602(a) of the CGCL establishes the basic, or default, requirement for shareholder action other than the election of directors: the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders. (The articles of incorporation or the CGCL (such as Section 902(a)) may impose a higher vote or vote by classes). Under this standard, abstentions “count” if they prevent a proposal from receiving affirmative vote of a majority of the required quorum. This rule prevents a very small number of shareholders from taking action. For example, a California corporation has 100 shares issued and outstanding, the required quorum (unless otherwise provided in the articles) is 51 shares. If 51 shares were present at a meeting and 5 shares were voted for, 4 shares were voted against, and 42 shares abstained, the shareholders have not taken action even though a quorum was present and more votes were cast for than against the proposal. The reason is that the votes cast “for” do not constitute at lease a majority of the required quorum. Under Section 216(2) of the Delaware General Corporation Law, the default required vote (in the absence of a specification in the certificate of incorporation or bylaws) is the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Under this standard, abstentions must be counted.
Not counting abstentions is at odds with the NYSE’s shareholder approval rule. The New York Stock Exchange requires shareholder approval of specified matters. When shareholder approval is required, Rule 312.07 of the Listed Company Manual requires the approval of a majority of the votes “cast”. Oddly, the NYSE considers abstentions as votes “cast”. This means that the NYSE, unlike the CII, requires that abstentions be counted.
Not counting abstentions may weaken shareholder protections. A proponent of a stockholder proposal can generally be expected to want a lenient standard for approval. When it comes to management proposals, however, that same shareholder is likely to fight for a higher voting standard. Indeed, Delaware corporations, recognizing the advantages of a lower vote requirement, sometimes adopt a majority of the votes cast standard rather than the default standard in Section 216(2). State legislators, moreover, recognize that sometimes a higher vote requirement may be more, not less, protective of shareholders. That is why they impose a majority of the outstanding shares requirement for certain fundamental corporate actions such as amendments of the articles of incorporation. Importantly, a majority of the outstanding shares voting rule does not prevent a minority group from blocking action when the majority group is comprised of apathetic owners.