Shareholder voting standards was a hot topic this proxy season and will likely continue to be of significant interest next proxy season and in subsequent years. This proxy season, shareholders submitted various proposals related to shareholder voting standards, including proposals on access to interim proxy votes (discussed further here) and uniform voting standards for management and shareholder proposals. In June, Nabors Industries’ shareholders approved a shareholder proposal to exclude broker nonvotes from the company’s voting calculation. The shareholder proposal was introduced by the California Public Employees’ Retirement System (“CalPERS”) after close votes on shareholder proposals submitted at last year’s annual meeting. The proposals last year did not receive majority support under the company’s methodology of including broker nonvotes, but would have received a narrow majority if broker nonvotes were excluded.
As proxy season wraps up for many companies, Cheniere Energy Inc. continues to be in the spotlight over its vote-counting methodology. The company was forced to postpone its annual meeting scheduled in June after a lawsuit filed by a shareholder seeking to recover shares of stock that were awarded under the company’s incentive plan last year. The shareholder claims that the plan did not receive requisite shareholder approval, because the company did not count abstentions as a “no” vote as the shareholder claims was required under Delaware law. The complaint also seeks to enjoin a shareholder vote on a proposal that was slated for this year’s annual meeting on increasing the number of shares authorized for issuance under the company’s incentive plan. The Wall Street Journal reported that the company has canceled the compensation plan proposal and has moved to dismiss the lawsuit, saying “the vast majority of the plaintiff’s claims are moot” with the cancellation of the proposal.
The confusion over vote counting stems from the various sources of authority and standards governing the shareholder vote-counting methodology. To determine the vote-counting methodology for any particular vote, a company has to consider state law requirements, charter provisions, bylaw provisions and any stock exchange requirements. After determining the proper voting standard on a proposal (e.g., majority of votes cast or majority of shares present and entitled to vote), the company then needs to consider the treatment of abstentions and broker nonvotes under state law, governing documents and exchange requirements. A study prepared for CalPERS by GMI Ratings in September 2013 found that public companies were inconsistent in their treatment of abstentions and broker non-votes when applying similar voting standards.
Typically, under the “majority of shares present and entitled to vote” standard under Delaware law, abstentions are counted as present and entitled to vote and have the effect of a “no” vote. In a “majority of votes cast” standard under Delaware law, abstentions are not considered votes cast and have no effect on the vote outcome. However, the New York Stock Exchange (NYSE) rules require shareholder approval for certain corporate actions, including all equity-compensation plans and material revisions thereto, and impose a standard of majority of votes cast for these proposals. In addition, the NYSE has historically deemed abstentions as votes cast, in contrast to the Delaware standard of not counting abstentions under this voting standard.
In the Cheniere case, the shareholder claims that the company was required to count abstentions as a “no” vote under the “majority of shares present and entitled to vote” standard under the company’s bylaws and Delaware law. On the other hand, as Bloomberg reported, Cheniere argued in court filings that it was applying the NYSE rules that focus on the votes-cast standard and did not count abstentions as negative ballots. It will be interesting to see which standard(s) the Delaware Court of Chancery applies in this case.