Prof. Gordon Smith provides a scholarly analysis of a recent Chancery Court decision that addresses shareholder voting tallies:
Licht v. Storage Technology Corp. has the look of an entirely conventional dispute in the Delaware Court of Chancery. Licht is a stockholder in Storage Technology, and he wants the company to adopt cumulative voting for directors. He submitted a proposal to the effect at the annual meeting of stockholders, and a majority of the shares voted supported his proposal. Unfortunately for Licht, a number of shares abstained from voting, and these votes are counted as “no” votes under Delaware law. Pretty straightforward, but the case contains a clarifying twist at the end that will make it a nice case for my teacher’s manual.
First the law. Section 216(2) of the Delaware General Corporation Law provides: “In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders.” This is a default rule, subject to change by the company. In this instance, the company’s bylaws stated: “Except as otherwise provided by statute or by the certificate of incorporation, . . . the affirmative vote of a majority of the shares represented at a meeting at which a quorum is present and entitled to vote on the subject matter shall be the act of the stockholders.”
You can imagine a world in which the voting rules specified that a “majority of the votes cast” was the metric, but that is not the default rule in Delaware, and it is not the rule adopted by the company’s bylaws. Even though a share “abstains,” it is present at the meeting and entitled to vote on the proposal. Under the prevailing standards, therefore, Licht doesn’t have much of an argument.
The clarifying twist lies in the Court’s “distinction between an abstention and the lack of authority to vote.” While a share that “abstains” is both present at the meeting and entitled to vote, a share without authority to vote on a particular matter may be present at the meeting (for purposes of establishing a quorum), but not “entitled to vote” on the proposal. Such shares — which include broker non-votes — are not considered in determining the majority.
The decision can be obtained from the Chancery Court’s website.