What a difference a few months make. Since last fall, governance experts have anticipated a special report from the American Bar Association’s Committee on Corporate Laws that would re-examine the Model Business Corporation Act and possibly recommend majority election of board directors. Popular sentiment was that the Committee, chaired by former Delaware Chancery Court Chief Justice Norman Veasey, would bring direction the heated issue.
Times have changed. Since the committee introduced its preliminary report in January, events at boardrooms and shareholder meetings across America have outpaced it—partly because governance watchdogs were disappointed that the report fell well short of their expectations, and endorsed a continued policy of plurality elections. So, when the Committee last week issued the second version of its proposal, most observers showed little interest.
Ferlauto
“It’s basically the same,” says Richard Ferlauto, director of pension and benefit policy at the American Federation of State County and Municipal Employees. AFSCME has emerged as a leading advocate of majority-election reform this spring, supporting those resolutions at Hewlett-Packard, United Technologies, Pepsico and other bellwether companies.
Ed Durkin, spokesman for the United Brotherhood of Carpenters, says the ABA Committee “pretty much went with what they had proposed.”
Even Veasey agrees. “It did not change much from the preliminary report,” he concedes. “The essence of it is basically the same.”
These days, majority vote proponents are more excited about the growing number of companies, led by Intel Corp., that have chosen to amend their by-laws to require that directors be elected by a majority of votes cast.
“This is one of those situations where the thinking on the issues has evolved very significantly in two months,” says Ann Yerger, executive director of Council of Institutional Investors. “I have never seen a governance issue with so much momentum in a short period of time.”
Veasey
“I think it is fine that corporations are doing it on their own,” Veasey says, although he is somewhat frustrated that critics have discounted the significance of his Committee’s proposals simply because they don’t call for wholesale replacement of the statutory plurality default rule to a majority default rule. “It’s been a plurality vote for 20 years,” he says. “The burden is on someone to change the default.”
According to the Committee’s report, a change in the statutory plurality default rule would apply to all corporations governed by the Model Act’s provisions where those corporations have not opted out of the plurality default rule in their articles of incorporation.
The Committee, however, concluded that the consequences of a failed election for some corporations make it unwise to change the statutory plurality default rule, since it would apply universally to all corporations governed by state statutes adopting the Model Act provisions. Instead, the Committee decided that the statutory framework should facilitate individual corporate action.
Among other proposals, the Committee would permit shareholders or directors at individual companies to adopt a bylaw providing for a form of majority voting. “We think legislation should not be a one-size fits all for all corporations,” Veasey says. “There are unintended consequences for some.”
The latest report acknowledges that the Committee considered the so-called “Intel model,” which requires directors to win a majority of votes cast in an election. The committee, however, worried that the Intel approach raised too many unanswered questions during a contested election to warrant its being the default standard.
The committee ultimately stuck with its earlier proposal for the creation of a Section 10.22 bylaw, which is also a “modified plurality” standard. Under this proposal, each vote cast may be voted for or against up to that number of candidates that is equal to the number of directors to be elected. In addition, to be elected, a nominee must receive a plurality of votes cast. However, if the nominee receives more votes against than for election, his candidacy must end within 90 days.
Veasey says this statute “would create a form of majority vote by an enabling mechanism centered on a specific bylaw.” It would “do away with ‘withhold’ and authorize ‘for’ and ‘against’ voting, eliminate the holdover rule, and limit the director in most circumstances to a 90-day term or less.”
In its latest report, the Committee wrote that “corporations should be free, through adoption of a provision in the articles of incorporation approved by the directors and shareholders, to tailor their own carve-outs for contested elections if they consider it desirable. Similarly, the Committee believes that directors, in adopting resignation policies, should be permitted to exclude contested elections if they so choose.”
In any case, the Committee says it is deliberately taking the unusual steps of providing three opportunities for public comment because of the high level of public interest in the election of directors. The Committee first released a discussion paper last June, and released its preliminary report in January.
The Committee’s recommendations now proceed to the official comment period following publication in The Business Lawyer. That comment period ends May 30, and then will come a final draft this summer.
Allen
“They are trying to do something carefully crafted and limited,” says Claudia Allen, chair of the corporate governance practice at law firm Neal Gerber Eisenberg. “It will take awhile to see what comes out of it. They are reluctant to have a broad-based default standard. They want individual companies to do something.”
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