The Sacrosanct Right to Vote

POMERANTZ MONITOR | MARCH APRIL 2023

By Gustavo F. Bruckner and Henry Tan

Among the most important rights belonging to a stockholder is the right to vote. Alongside the rights to sue and sell, the right to vote is treated by the Delaware Chancery Court as “sacrosanct.” Therefore, any challenge to a free and fair election is rigorously scrutinized by the Court as are challenges to the accuracy of information provided to stockholders in advance of an election. One issue that periodically emerges is whether a board has set out the correct voting standard, in particular as it pertains to the treatment of broker non-votes.

Today, most stockholders are no longer “stockholders of record” but rather “beneficial shareholders.” That is, they do not hold stock certificates and do not own their shares directly. Instead, they hold their shares in “street name,” while their brokerage firms act as the “stockholders of record.” During stockholder meetings, brokers have full discretion on how to vote these shares on routine matters, such as the approval to hire an independent accounting firm. However, for non-routine matters, beneficial shareholders must give instructions to their brokers on how to cast their vote. Beneficial shareholders who fail to instruct their brokers will have their shares recorded as “broker non-votes.”

Broker non-votes are not considered “votes cast” under Delaware law, so any vote that requires a majority of votes cast will not include broker non-votes in the “denominator” for purposes of tallying votes. However, if the vote requires a majority of “outstanding shares,” then broker non-votes will be included in the denominator because they are included within outstanding shares. In this situation, a broker non-vote essentially amounts to a vote against the proposal. Because broker non-votes raise the number of “yes” votes that will be needed to pass proposals, some companies have sought to circumvent the issue by failing to tabulate broker non-votes or lumping the broker non-votes with “yes” votes.

The Astrotech case illustrates the issue. On May 12, 2020, Astrotech Corporation filed a proxy soliciting stockholder approval for various proposals, including a Certificate Amendment that would authorize 35,000,000 new shares. Under the company’s rules, approval of the Amendment required a majority of outstanding shares. Since 7,575,464 shares of common stock were outstanding, approval of the proposal required 3,787,733 “For” votes. The Certification Amendment was a non-routine matter, meaning a stockholder’s failure to vote on the proposal would create a broker non-vote, effectively a vote against the Amendment.

On June 29, 2020, Astrotech held its annual shareholder meeting and released the results of the vote. The Certificate Amendment was approved by 5,306,464 “For” votes to 1,030,210 “Against” votes; however, not a single broker non-vote was tabulated. This omission was even more glaring considering that broker non-votes were correctly tabulated for the other two non-routine proposals – the votes on the directors and the vote on the Plan Amendment. All five directors and the Plan Amendment proposal received exactly 3,500,819 broker non-votes. The discrepancy suggests that Astrotech improperly counted the broker non-votes as “For” votes to pass the Certificate Amendment.

Properly tabulated, the Certificate Amendment received 1,805,645 “For” votes, 1,030,210 “Against” votes, 35,509 abstentions, and 3,500,819 broker non-votes. The voting standard required a majority of outstanding shares, and because only 1,805,645 of the 7,575,464 outstanding shares voted “For,” the Certificate Amendment failed to pass. By tacking the broker non-votes to the “For” votes, Astrotech had circumvented the will of its stockholders and improperly approved the issuing of 35,000,000 new shares.

The voting error raised new problems when the company scheduled its next shareholder meeting in 2021. Specifically, Astrotech improperly issued 9,596,206 shares over the 15,000,000 authorized limit. These unauthorized shares represented approximately 40 percent of the proper voting power. If the 2021 shareholder meeting were allowed to proceed, the unauthorized shares would have rendered the outcome invalid because it would have been impossible to tell whether the proposals were approved by valid or invalid shares. At this point, Pomerantz intervened on behalf of an Astrotech stockholder and initiated litigation in the Delaware Chancery Court to void the 2019 Certificate Amendment.

The company admitted its error and negotiated a settlement whereby Astrotech agreed to file a motion for approval under the Delaware General Corporation Law § 205, which allows the Chancery Court to approve and remedy corporate actions that were tainted by technical errors that may result in accidental harm. In this case, the Court used § 205 to approve the 2019 Certification Amendment and the shares issued under the Amendment’s authorization.

Astrotech also agreed to implement certain corporate governance policies. Specifically, the Audit Committee Charter was amended to require proxy review procedures, such as requiring an outside advisor to aid the Board in evaluating proxies for errors and omissions. Such a third-party review would likely have caught the error in the applied voting standard.

Given the opportunity for mischief that surrounds broker non-votes, shareholders can expect to see more cases concerning defective proxies due to broker non-vote issues.