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  • Introduction to Voting Power of Shareholders in the U.S. Corporation

Introduction to Voting Power of Shareholders in the U.S. Corporation

2024-11-20
Voting rights pertain to the entitlement of corporate shareholders to participate in decisions regarding corporate policies. Typically, only shareholders of record have the privilege to vote either in person or through a proxy (unless they possess non-voting shares) during a shareholders' assembly. The corporate records will list the owners of all outstanding shares, along with the record date preceding the meeting.

Unlike in a democratic government, where individuals typically have a single vote, shareholders have voting rights that correspond to the number of shares they own. As a result, those who own more than 50% of a company have a majority of the voting power and are most likely to have a controlling interest in the company. Next, we will briefly describe the voting rights of shareholders in U.S. corporations.

  1. Quorum and Voting

    (1)
    		 How to Determine if There is a Quorum?

    Given that required meeting notification has been provided, shareholders are only able to make decisions during a meeting if a quorum is present. The presence of a quorum, and thus the sufficiency of a vote to carry out an action, is determined by the total number of shares rather than the number of individual shareholders. Each outstanding share typically holds one voting right, unless specified otherwise in the articles. A quorum is achieved when the majority of outstanding shares are in attendance.

    Example: Corporation possesses 20,000 shares that are currently outstanding among 700 shareholders. A quorum is required for a meeting to proceed, necessitating the presence or representation of at least 10,001 shares. In the absence of a quorum, shareholders are unable to conduct any actions during the meeting. Once a quorum is established, it is considered to be maintained for the duration of the meeting, irrespective of shareholders departing. It is important to note that the regulations regarding quorum differ for directors' voting, as the presence of individuals is crucial to maintaining a quorum during such proceedings.
    (2)
    		 Voting after There is a Quorum

    (a)    Director Election

    After achieving a quorum, in the event that shareholders are in the process of electing directors, the candidate who garners the highest number of votes for a particular board seat will be successful, irrespective of whether they secure a majority of the votes cast.

    (b)    Bylaw Amendment

    For routine matters that may be subject to shareholder voting, such as the amendment of bylaws, there exists a divergence in authority. Most states require only a majority of the votes actually cast on the issue.

    Example: The Corporation, with a total of 20,000 shares outstanding, convened a meeting where 12,000 shares were represented, thus constituting a quorum. Among these 12,000 shares, only 10,000 actually voting on a specific proposal. According to the conventional principle, a resolution would require a minimum of 6,001 affirmative votes to be passed, representing a majority of the shares present. In contrast, the modern perspective stipulates that only 5,001 affirmative votes are necessary for the resolution to be approved, signifying a majority of the shares that actually voted in the voting process.

    (c)    Director Removal

    In cases where shareholders seek to remove a director prior to the completion of their term, the conventional method, which remains in practice in Delaware, necessitates the approval of a majority of the shares with voting rights.

    Example: Corporation has 20,000 shares outstanding. During a meeting, a quorum is established with 12,000 shares present. Among these, 10,000 actually vote on whether a director should be removed before the expiration of her term. In Delaware, the director cannot be removed. Removal must be approved by a majority of the shares entitled to vote, and not a majority of shares present or a majority of shares that actually do vote. Given there are 20,000 outstanding shares, a majority of that number (at least 10,001) would be required to vote in favor of the director's removal. As only 10,000 voted, the requirement cannot be met.

    In contrast, however, the modern perspective agree that removal necessitates a simple majority of the votes that were actually submitted on the matter. In the example above, because 10,000 shares voted on the issue, the director would be removed if a minimum of 5,001 votes were in favor of her removal.

    (d)    Fundamental Corporate Change Approval

    If shareholders are voting to approve a fundamental corporate change, such as a merger. The conventional stance, upheld in certain jurisdictions like Texas and Ohio, dictates that the fundamental change must be approved by two-thirds of the shares entitled to vote. The second view in the MBCA (2016) is that the fundamental change must be approved by a majority of the shares entitled to vote. Under this view, a fundamental change need be approved only by a majority of the shares that actually vote on the matter.

  2. Cumulative Voting

    Cumulative voting is a mechanism utilized in the election of directors by shareholders, specifically designed to enhance the opportunities for minority shareholders to secure representation on the board. This method is distinct from other voting processes and is not applicable to decisions on matters beyond director elections. In the context of electing directors, shareholders can opt for either "straight" voting or "cumulative" voting. In both cases, a directorial candidate is elected based on a plurality of votes, whereby the candidate receiving the highest number of votes among competitors is successful, even if they do not secure a majority of the total votes cast.

  3. Voting By Proxy

    Shareholders have the option to cast their votes through a proxy, establishing an agency relationship where the shareholder (as the principal) designates an agent (the proxy) to vote on their behalf.  The MBCA (2016) uses the term “proxy " to refer to the agent appointed to vote for the shareholder, providing that a shareholder “may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, or by an electronic transmission.” Courts have upheld appointments that omitted the name of the proxy, the date of the meeting, or the date on which they were executed. Furthermore, the person appointed as proxy need not be a shareholder.

    (1)
    		 How Long is a Proxy Effective?

    In most states, the designation of a proxy remains valid for a period of 11 months by default, unless specified otherwise in the document. In a few states, there is an absolute limit-say, seven years-beyond which a proxy will not be effective. In most states, though, a proxy is good for whatever time it states. If it is silent on duration, it is 11months. (The theory is that a new appointment form should be executed before each annual meeting.)

    Because a proxy is an agent, the appointment is revocable at the pleasure of the shareholder. Thus, regardless of the stated duration of the proxy, it can be revoked anytime. Revocation can be express or by implication. For example, the execution of a later proxy appointment constitutes are vocation of an earlier, inconsistent appointment. Because later proxy appointments revoke earlier ones, it is important that proxy documents be dated.

    Inspectors of elections, where there is a contest, must determine which is the latest appointment form executed by a specific shareholder to determine how the shares are to be voted. The shareholder's attendance at a meeting may also constitute revocation of a proxy appointment, though this depends on the intention of the shareholder. The shareholder may be required to express her intent to revoke at the meeting. Death of the shareholder will also result in revocation of the appointment, at least when the corporation is informed of the fact of the death.
    (2)
    		 Can a Proxy Appointment be Made Irrevocable?

    Generally, the mere statement in the appointment form that it is irrevocable is meaningless. But the Supreme Court established that an appointment purporting to be irrevocable will be irrevocable if it is “coupled with an interest.” This means that the proxy has some interest in the stock other than the interest in voting as the shareholder’s agent. For example, if the proxy appointment is given to someone to whom the stock has been pledged (for example, as collateral for a loan), it will be “coupled with an interest.”

    Example: S is a shareholder of Corporation on the record date of the annual meeting, and thus is entitled to vote at that meeting. After the record date, but before the meeting itself, Sells the stock to P. S executes an appointment form (or electronic transmission) authorizing P to vote the shares at the annual meeting, which provides that itis irrevocable. This proxy is irrevocable because it says so and is “coupled with an interest”: the proxy owns the shares, and thus has an interest in it other than simply voting.

    Finally, we emphasize that appointment of proxies is permitted for shareholder voting. It is not allowed, however, for director voting. Public policy requires that directors exercise their independent judgment in voting. Thus, proxies among directors for voting as directors are invalid.

Reference:
[1] Richard D. Freer. The law of corporations in a nutshell. West Pub. Co, 2020.

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