I’ve written many posts on the subject of voting because it seems so straightforward and yet turns out to be complex. In tackling any voting problem, it is important to know and understand the applicable voting rule. An example of a voting rule can be found in Section 708(c) of the California Corporations Code which prescribes the rule for director elections. Unfortunately, there are many voting rules and variations of voting rules even within the California General Corporation Law. See, e.g., Sections 152, 153, and 1001(d).
With Delaware corporations, the default voting rule for stockholder action (other than director elections) and certain other actions (e.g., amendments to the certificate of incorporation (Section 242) and mergers (Section 251)) is the affirmative vote of the majority of the shares present in person or represented by proxy at the meeting and entitled to vote (Section 216). This voting rule may be altered in either the certificate of incorporation or the bylaws and many Delaware corporations have opted for a majority of the votes cast voting rule. The principal difference between these two rules is the treatment of abstentions. In the case of the default rule in Section 216, abstentions are considered present and entitled to vote. Under a votes-cast voting rule, an abstention is by definition a vote not cast and thus does not affect the outcome.
As a practical matter the Delaware default rule will generally make it more difficult for stockholders to take action because an abstention has the effect of a “no” vote. If you’re submitting a shareholder proposal, you would be more happy with a votes-cast voting rule. On the other hand, if you are opposing a proposal, you should favor the Delaware default rule or even a more stringent voting rule, such as a majority of the outstanding shares.
I don’t know why Delaware opted for its default rule. In some ways, it strikes me as unjustifiably counting the indifferent and undecided. If purpose of a vote is to implement the intentions of the stockholders, isn’t the intention of a person who abstains to not affect the outcome? The Delaware default rule does the opposite and casts the indifferent and undecided into the same kettle as the naysayers.
Recently, for example, Berkshire Hathaway Inc. attracted a great deal of attention for abstaining on a vote to approve The Coca-Cola Company’s 2014 equity compensation plan. According to The Wall Street Journal, Warren Buffet elected to abstain in part because “he didn’t want to endorse a public campaign against the equity plan by a smaller Coke shareholder by voting ‘no'”. A votes-cast voting rule allows a stockholder to remain neutral while Delaware’s default rule does not.
Moreover, why should the indifference or indecision of a stockholder who attends a meeting affect the outcome while the indifference or indecision of an absent stockholder have no impact? If the idea is to raise the bar for stockholder action, wouldn’t it make more sense to raise it by imposing voting rule that requires a super-majority of the votes cast? At least that voting rule would ensure that a minority (whether management or outsider) does not dominate an uninvolved or irresolute majority.