Two standards are emerging in the push to replace the current plurality vote standard in the election of directors.
Under the existing law 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. As the result of the SEC’s proxy rules, which require only that a proxy card allow shareholders to “withhold” authority from a proxyholder to vote for a nominee, but do not require shareholders to be able to vote “against” a nominee unless state law gives effect to a vote “against,” most proxy cards provide shareholders with the opportunity to vote “for” a nominee or to “withhold” authority to vote for a nominee, but do not allow a shareholder to vote “against” the nominee. Therefore, under the plurality vote standard, a nominee may be elected with a single favorable vote in an uncontested election, even if a majority of the shares withhold their vote on the nominee. 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 vote standard and the holdover rule are intended to ensure that the board contains the full number of authorized directors.
In June 2005, the board of directors of Pfizer Inc. amended its corporate governance principles to provide:
- any nominee for director who receives more “withheld” votes than votes “for” election must promptly submit his resignation to the board;
- the Corporate Governance Committee will promptly consider the resignation, and possible responses, and make a recommendation to the board;
- the board will act upon the recommendation within 90 days following certification of the shareholder vote;
- Pfizer will promptly disclose the board’s decision-making process, the decision to accept or reject the resignation and the reasons for any decision to reject the resignation in a Form 8-K furnished to the SEC; and
- any director submitting a resignation will not participate in the Corporate Governance Committee’s or the board’s discussions regarding the resignation.
Until the resignation is accepted, the nominee remains duly elected. Furthermore, Pfizer’s policy expressly permits the board to reject the resignation. Pfizer’s policy requires only a withheld vote by a majority of the votes cast. By contrast, Office Depot’s newly adopted guidelines require a withheld vote by a majority of the shares outstanding.
By permitting the board to reject the resignation, Pfizer addresses two common objections to the majority vote standard:
- the failure to elect a certain number of directors could trigger a “change in control” provision under a material contract; and
- this failure could also cause the company to fail to comply with listing qualifications and governance guidelines which require a specified number of directors or directors with specific qualifications.
Variations of Pfizer’s corporate governance principles have recently been adopted by the boards of Circuit City Stores Inc., The Walt Disney Company, The Williams Companies, Inc., Raytheon Company, Safeway Inc., Gannett Co., Inc., EMC Corporation, Hewlett-Packard Company, American International Group, Inc., State Street Corporation and Wells Fargo & Company, among others.
Pfizer’s corporate governance principles provide only that the Corporate Governance and Nominating Committee will consider “a range of possible responses [to the resignation] based on the circumstances that led to the [m]ajority [w]ithheld [v]ote.” In contrast, Wells Fargo’s guidelines provide that the Corporate Governance and Nominating Committee will consider all factors it deems relevant in determining whether to recommend that the board accept or reject a resignation, including:
- the stated reasons for the withheld votes;
- the director’s length of service and qualifications;
- the director’s contributions to the company; and
- the company’s corporate governance guidelines.
In January 2006, the board of directors of Intel Corporation amended its bylaws to provide that in an uncontested election:
- a nominee for director will be elected if the number of votes “for” the nominee exceeds the number of votes “against;”
- if any incumbent director is not elected, he shall offer to tender his resignation to the board;
- the Corporate Governance and Nominating Committee will make a recommendation to the board whether to accept or reject the resignation or take other action;
- the board will act on the Committee’s recommendation and publicly disclose its decision and rationale within 90 days of the date the election results are certified; and
- a director tendering a resignation will not participate in the board’s decision.
In a contested election, Intel will continue to apply the plurality vote standard because the existence of multiple candidates increases the likelihood that no candidate will receive majority approval.
Variations of Intel’s majority vote standard have recently been adopted by United Technologies Corporation, Dell Inc., Texas Instruments, PepsiCo, Inc. and Automatic Data Processing, Inc., among others. In addition, a number of companies have long had majority vote standards, including Lockheed Martin Corporation.
Section 708 of the California General Corporation Law provides that votes against a nominee, and votes withheld, have no effect. In addition, Section 708 requires a plurality vote standard. The statute does not provide that these provisions can be varied by the articles of incorporation or the bylaws. In the absence of an amendment of Section 708, it is not clear that the bylaws of a corporation formed under the laws of California can contain a majority vote standard.
For further information, please contact Peter M. Menard at (213) 617-5483.