Senator Richard Alarcon (D: San Fernando Valley) has introduced a bill that would require a company incorporated in California to elect directors by a majority of the votes cast in an uncontested election. The bill codifies a majority vote standard similar to those already adopted by Intel Corporation, Dell Inc., PepsiCo, Inc., Texas Instruments and others.

Under the plurality vote standard in effect in a majority of states, including California and Delaware, the nominees for director receiving the highest number of affirmative votes, up to the number of directors to be elected, are elected. Votes against a nominee, and votes withheld, have no effect. Therefore, a nominee may be elected with a single favorable vote, even if a majority of the shares withheld their vote on the candidate. As a result, in an uncontested election, a nominee is virtually assured of being elected. In addition, in a majority of states, each director holds office until the expiration of the term for which he was elected and until a successor has been elected and qualified (the “holdover rule”). The plurality voting standard and the holdover rule are intended to ensure that the board contains the full number of authorized directors.

Alarcon’s bill would not change the plurality vote standard or the holdover rule in a contested election. A contested election is an election in which the number of nominees exceeds the number of vacant positions on the board of directors.

In an uncontested election, Alarcon’s bill would require:

  • the affirmative vote of a majority of the shares represented and voting (which also constitute at least a majority of the required quorum) to elect a director, with votes against and votes withheld being given effect; and
  • an incumbent director who fails to obtain a majority vote to resign within 90 days to address the holdover rule. Thereafter, the board may declare vacant the office of that director.

A corporation could amend its bylaws to provide that uncontested elections of directors would instead be subject to the plurality vote standard applicable to contested elections. However, the amendment would require the affirmative vote of a majority of the outstanding shares entitled to vote.

As drafted, the bill does not appear to require the board to accept the resignation or to prohibit the board from reappointing the director to fill the vacancy. Presumably, if the entire board is required to resign, it would need to appoint a director to fill at least one of the vacancies in order to continue the uninterrupted business of the company, although the bill does not directly address this situation.

If adopted, Alarcon’s bill may apply to a corporation formed under the laws of a state other than California. The bill would amend Section 708 of the California General Corporation Law (the “CGCL”), which currently governs both a shareholder’s right to cumulate votes in the election of directors and the vote required to elect a director. However, Section 2115 of the CGCL purports to subject foreign corporations with strong ties to California (based on the proportion of its property, payroll, sales and outstanding securities in California) to certain provisions of the CGCL, including Section 708.

For further information, please contact Peter M. Menard at (213) 617-5483.