March 12, 2007
Majority Voting: A Fait Accompli?
Posted by Lisa Fairfax

Like Christine, I have been sick this past week-only mustering the strength to get to class and back. Before that however, I had been doing research on majority voting. What I found startling was that from a Wachtell memo predicting that majority voting would soon become universal to a Latham and Watkins memo stating that majority voting was a “train that had left the proverbial station,” practitioners appear to be universal in their belief that majority voting is a fait accompli. As a result, law firm memos advise corporations confronted with a shareholder proposal on this issue to acquiesce, while many others suggest corporations should get out ahead of the issue and voluntarily alter their voting regime. In this kind of environment, it is no wonder that, as of February 2007, 52% of S&P 500 companies and 45% of Fortune 500 companies had adopted some version of a majority vote system—a startling rate of change when compared to the small percentage that had such systems in place in 2005. And there is no hint of a slowdown since shareholders already have submitted a record number of majority vote proposals for the 2007 proxy season.

But what does it all mean? I get the sense that many practitioners believe (or maybe hope) that a majority vote system will not have much impact, but some recent developments may ensure that shareholders do have some greater power in such a regime, if only at the margins.

One of the reasons why majority voting may seem insignificant is because although majority vote proposals have received a record level of shareholder support, it is not clear that such support can be replicated in the context of director elections and withheld campaigns. This is because a variety of different shareholders with different agendas have joined together in favor of majority voting. Who knows if they will join together again.

A second reason why one might dismiss the importance of majority voting is the fact that the incidences of directors actually failing to receive a majority vote are rare. In recent years there only appears to be one such incidence. Even Disney shareholders did not manage a majority withhold vote. Some experts suggest that shareholders may be even more hesitant to engage in a withheld campaign under a majority vote system because such a campaign has real consequences. Yet I am not sure about this assessment. In fact, some proxy data indicates that shareholders are using withheld campaigns with greater frequency, and a majority vote regime certainly gives shareholders greater bargaining power in the context of those campaigns. As Disney suggest, you do not actually need a majority vote to trigger corporate response.

A third reason why some may dismiss majority voting is because even under such a system, corporations continue to have discretion over the fate of directors. Thus, the proxy data reveals that most companies have adopted the Pfizer “plurality plus” system as opposed to a full-scale majority vote regime. This means that when a director receives a majority of withheld votes, she must tender her resignation and then the board has some period of time to decide whether to accept the resignation. These kinds of systems seem to mute the impact of majority voting, especially because some of the factors boards consider when deciding whether to accept a resignation have nothing to do with the reasons for the withheld vote. However, it is unclear if directors will feel comfortable relying on those factors. Moreover, the recent proxy data suggest that more companies have begun to adopt a full-fledged majority vote system. In addition, the latest development in plurality plus systems has been to require that corporations accept a resignation “unless there are compelling reasons” not to do so.

Hence, corporate responsiveness may have galvanized shareholders to push for a majority vote regime where they actually do have some power over directors, even if they only use it in rare instances.

Note: My earlier post neglected to point out that the data referred to regarding majority voting is based on a study by Claudia Allen of Neil, Gerber, & Eisenberg, LLP, available here.

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