6 things to consider when deciding whether to keep supermajority voting
– Consider six factors when deciding whether its worth keeping supermajority voting requirements.
– They include the history of the provision for your company (ie. what was the original purpose), is it still serving your interests, what your investors are saying, and whether your company is a controlled one.
I love this practical piece from Carol Nolan Drake about supermajority voting requirements. Carol starts with a nice lesson about filibusters and then gets into the questions you should be asking when it comes to supermajority voting requirements.
Here are Carol’s six things to consider when deciding whether the supermajority voting requirement should remain in place:
- History – What is the history of the supermajority vote threshold at the company and when it was implemented? Does it still serve its original purpose? Consider that companies, like Tesla, that require a supermajority vote under certain circumstances, have encountered difficulty garnering enough votes for the passage of management-supported proposals, much less shareholder proposals. (Refer to published insights by Kosmas Papadopoulos, ISS Analytics, in the Harvard Law School Forum on Corporate Governance, on July 6, 2019.) As an example, the Corporate Finance Institute (CFI) noted in its, “Implications of a Supermajority Provision”:
Although a supermajority voting provision helps ensure that the large majority of shareholders are on board with the corporate action, it may cause gridlock among shareholders and adversely affect the corporate efficiency of the company – it makes it more difficult for corporate actions to pass. A supermajority voting provision may allow for a minority to block the preferences of the majority.
- Controlled Company – Is the company a controlled company with a small block of controlling shareholders? Results from previous proxy seasons show that controlled companies may find it harder to pass important proposals, given the need for minority shareholder support. For minority investors, however, they may prefer a supermajority vote requirement to “ensure that significant decisions are not made unilaterally by the controlling shareholder(s) depending on the stake of the controlling entity,” as noted in the previously cited article by Papadopoulos.
Supermajority vote requirements can operate like the adoption of poison pills and be an effective anti-takeover strategy. The company may need to consider whether the ownership in the company has changed since its incorporation and how shareholders perceive the supermajority provisions. If large global fund managers hold extensive amounts of shares today, how does this influence the consideration of the needs of minority shareholders?
- Broker Non-Votes – How do broker non-votes impact the shareholders’ ability to vote for passage of management and/or shareholder proposals? According to Papadopoulos’ research, the “increase in failed majority-supported proposals in recent years can be directly attributed to the change in the rules pertaining to the treatment of broker non-votes.” Does the company know the overall percentage of votes cast, the votes present at the meeting (even virtual) and the number broker non-votes (not instructed)? How the votes are tallied may well make a difference in the passage of important proposals.
- Is It Really Serving Our Interests? – Consider whether the supermajority threshold is getting in your own way to make changes to the Bylaws or amendments to the Charter that may be necessary over time. If the company has discussed changes to modernize or update these documents and the nature of investor ownership will make it difficult, you may need to conduct an expensive outreach to your investors to obtain the necessary votes.
- What Do Investors Say? – Have investors mentioned any concerns with supermajority voting requirements during their advocacy or outreach to company representatives? Consider the feedback from the outreach and engagement program that the Investor Relations Officer and/or C-suite officer(s) are conducting. If investors have mentioned concerns with the supermajority voting threshold, it may be time to consider whether the company should make a change on its own. Inaction may cause a shareholder proposal to be filed and the decision will no longer be at your leisure. Shareholder proposals to lower supermajority voting requirements have continued to be filed in the past proxy seasons.
- Other Concerns – What, if any, are the concerns that would prevent the company from moving to a simple majority vote threshold for changes to key company documents and for all proposals? Would it put the company in alignment with peers, provide insulation from shareholder proposals to call special meetings or encourage investors to vote to withhold or vote against directors?