Shareholder and director powers

The Fast Floor: Share Classes, Voting Groups, and the Shareholder’s Choice

Hold this order for a shareholder problem:

1. Identify the action and the shares ordinarily entitled to vote.
2. Check the articles for different classes, series, voting rights, separate class votes, and supermajority requirements.
3. Identify every voting group whose approval is required, then test quorum separately for each group.
4. Apply the voting rule, proxy rule, preemptive-right rule, or written-consent rule that matches the facts.

A class is not the same thing as a voting group. A normally nonvoting preferred class may still receive a separate vote on an amendment that adversely changes its rights, if the statute or articles requires that class vote. Each required voting group must satisfy its own quorum and approval requirement. Under the MBCA default, a shareholder quorum is a majority of the votes entitled to be cast by that voting group; the articles may alter the number but cannot reduce it below one-third. Once a share is represented for a purpose other than merely objecting to the meeting, it counts as present for the rest of the meeting. Abstentions count toward quorum but are not votes cast for or against the proposal.

A proxy is authority to vote another shareholder’s shares, not a transfer of ownership. It must be authorized in the required signed or transmitted form, ordinarily expires after 11 months unless it states otherwise, and is generally revocable. It becomes irrevocable only when the appointment states that it is irrevocable and is coupled with a legally sufficient interest. A proxy holder cannot manufacture a quorum for shares that were not properly represented, and a director cannot vote at a board meeting by shareholder-style proxy.

Preemptive rights protect against dilution, not against every corporate transaction. Unless the articles opt out, a shareholder generally has the right to buy a proportional amount of newly issued shares or convertible securities issued for money. The right is not a right to buy shares being sold by another shareholder. It ordinarily does not apply to issuances for noncash consideration, compensation, previously authorized options or convertible securities, or certain merger, reorganization, or employee-plan issuances. The shareholder must exercise the right and pay; the right does not itself block the issuance.

Written consent substitutes for a meeting, not for the required level of approval. The default is consent signed by all shareholders entitled to vote on the action. The relevant universe is not every shareholder: nonvoting holders and holders outside the required voting group need not sign. The articles may authorize less-than-unanimous consent, but then the statutory minimum vote must be met and notice must be given to nonconsenting shareholders. A class vote required at a meeting cannot be bypassed by obtaining consent from a different class.

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The Board’s Reach: Committees, Staggered Terms, and Director Protection

At a board meeting, start with the number of directors, not the number of shares. Under the MBCA default, a majority of the fixed number of directors constitutes a quorum; the articles or bylaws may change that number within the statutory limit. With a quorum present, the default approval rule is a majority of directors present. A director who attends but abstains helps establish quorum but does not cast a vote for the motion. Board action by written consent ordinarily requires every director’s consent, unlike a shareholder consent regime that may be altered by the articles.

A committee is still a board-created body, but its authority is delegated and bounded. It must contain at least two directors. A committee may exercise the board’s authority to the extent the board resolution, bylaws, or statute permits, but it may not independently authorize a distribution, approve or recommend an action requiring shareholder approval, fill vacancies on the board or a committee, or adopt, amend, or repeal bylaws. A committee can implement a distribution formula or amount that the full board previously approved, but it cannot make the underlying distribution decision for itself. The fact that every committee member voted unanimously does not cure a subject-matter limit.

A classified, or staggered, board divides directors into two or three classes, as nearly equal as possible, with different classes elected in different years. The point is not to give one class more votes; it is to prevent the entire board from being replaced at one election. A classified board therefore changes the number of seats currently being elected, not the basic shareholder voting mechanics. Under the MBCA default, directors of a classified board are removable only for cause unless the articles provide otherwise. A separate cumulative-voting limitation can also matter when shareholders seek to remove fewer than all directors.

Cumulative voting exists only if the articles provide for it under the MBCA. For the election at issue, each share receives a number of votes equal to the number of directors being elected in that voting group. The shareholder may allocate all votes to one candidate or divide them among candidates. In a classified board, use the number of seats in the class being elected, not the total number of seats on the board. Cumulative voting is therefore not a general veto over board action and does not apply to ordinary motions at a board meeting.

Indemnification asks a different question from whether the director is liable. It asks whether the corporation must or may pay defense expenses or other liability incurred because the person served as a director. If the director wholly succeeds on the merits or otherwise in defending a proceeding, the corporation must indemnify reasonable expenses, including attorney fees. If the director does not wholly succeed, indemnification is generally permissive only when the director acted in good faith, reasonably believed the conduct was in the corporation’s best interests when acting officially, and, in a nonofficial setting, reasonably believed the conduct was at least not opposed to those interests. In a criminal proceeding, the director also must not have had reasonable cause to believe the conduct was unlawful.

A proceeding brought by or in the right of the corporation is a near miss. The corporation generally cannot indemnify a director for liability imposed in that proceeding, although it may indemnify reasonable defense expenses if the director has been successful on the merits or otherwise, or if a court determines that the director is fairly and reasonably entitled to indemnification in view of all the circumstances. A settlement is not the same as wholly succeeding, so the mandatory-success rule does not automatically apply. Indemnification also does not decide the underlying merits and does not make unlawful conduct lawful.

The Supplied Rule: Separating a Class Vote from a Counting Error

Read supplied law by locating the operative verbs and conditions. Here, “constitutes a quorum” identifies the attendance threshold, “votes cast” identifies the approval denominator, and “separate voting group” prevents votes from one class from substituting for votes from another.

Supplied MBCA voting provision: Unless the articles of incorporation or the statute provides otherwise, a majority of the votes entitled to be cast on a matter by a voting group constitutes a quorum of that voting group. If a quorum exists, action is approved by that voting group if the votes cast in favor exceed the votes cast against. A class or series votes as a separate voting group when the statute or the articles requires that class or series to approve the matter separately.

A corporation has 1,000 common shares and 400 preferred shares. The preferred shares ordinarily have no voting rights, but the articles require the preferred class to vote separately on an amendment reducing its liquidation preference. At a special meeting, 600 common shares and 240 preferred shares are represented. Common shareholders cast 400 votes for and 200 against the amendment. Preferred shareholders cast 120 votes for and 120 against it.

Recurring errors are predictable:

• Treating every preferred or nonvoting share as permanently unable to vote misses the concrete fact that the articles require a separate class vote.

• Counting abstentions as votes against changes the approval calculation even though abstentions count for quorum but not as votes cast against.

• Using total board seats in a classified-board cumulative-voting calculation ignores that only the seats in the current class are being elected.

• Assuming unanimous committee approval cures a committee’s lack of authority overlooks the statutory subject-matter limits.

• Treating any favorable defense result as mandatory indemnification overlooks the narrower rule requiring the director to have wholly succeeded.

Three Pressure Tests: The Distinctions That Decide the Result

High-Yield Points - ⚡ Biggest Takeaways

Test quorum and approval separately for every voting group required to act. A committee’s unanimous vote cannot overcome a statutory limit on committee authority. Cumulative voting uses the seats currently being elected, while indemnification depends first on success and then on conduct standards.