The Hidden Logic of Shareholder Democracy
In the Hidden Logic of Shareholder Democracy, I examine the basic rules of shareholder voting. I begin with a simple observation: In Delaware, voting rules specify different voting populations, depending on the type of vote at issue. When shareholders vote on ordinary business matters, the voting formula focuses on the number of votes cast, once […]
Usha Rodrigues is the M.E. Kilpatrick Chair of Corporate Finance and Securities Law at the University of Georgia School of Law. This post is based on her SSRN working paper.
In the Hidden Logic of Shareholder Democracy, I examine the basic rules of shareholder voting. I begin with a simple observation: In Delaware, voting rules specify different voting populations, depending on the type of vote at issue. When shareholders vote on ordinary business matters, the voting formula focuses on the number of votes cast, once a quorum is achieved. For example, approval of shareholder-proposed bylaw amendments requires a majority of votes cast. The rules are even less demanding for director elections, which require merely a plurality of votes cast.
For fundamental changes to the corporation—things like a merger, amendments to the certificate of incorporation, or dissolution—the shareholder polity changes. In these cases, the board must recommend a proposal to the shareholders, and passage requires the affirmative vote of a majority of shares outstanding, which I term an absolute majority. That is, instead of hinging on the number of shares that vote, these fundamental changes require a majority of all outstanding shares, regardless of whether the shares are voted. It requires only a little mental arithmetic to appreciate the importance of this difference: Given that quorum is by default a majority, if an item only requires a majority of votes cast once quorum is established, then 25.1% of outstanding shares could be enough to approve it. An absolute majority, in contrast, requires a minimum of 50.1% of all shares, no matter what.
