Opinion ID: 1992274
Heading Depth: 1
Heading Rank: 4

Heading: Quorum/Voting Power Distinguished

Text: We have concluded that there was no merger with an Acquiring Entity and, therefore, that Article Fourteenth was completely inapplicable. However, we shall now assume, arguendo, that Proposal One involved a Business Combination with an Acquiring Entity, i.e., the Hall corporations, as affiliates of a 30% stockholder. Pursuant to Article Fourteenth, there are two voting requirements that must be satisfied for a Business Combination with an Acquiring Entity, such as the merger, to gain approval. First, there must be the  presence in person or by proxy of the holders of not less than 80% of the voting securities of the Corporation ( i.e., an 80% quorum) (emphasis added). Second, the Business Combination must be approved by the affirmative vote of 66-½% of the voting power present, in person or by proxy, at such meeting, excluding all voting securities owned beneficially, directly or indirectly, by the Acquiring Entity (emphasis added). Specifically, the supermajority language of Article Fourteenth establishing the quorum and voting requirements in such a situation provides: The presence in person or by proxy of the holders of not less than 80% of the voting securities of the Corporation shall be required to constitute a quorum at any such meeting. The affirmative vote of 66-2/3% of the voting power present, in person or by proxy, at such meeting, excluding all voting securities owned beneficially, directly or indirectly, by the Acquiring Entity [30% or more stockholder], shall be required for approval of any such Business Combination. The February 16, 1988, Proxy Statement and Notice of the March 11, 1988, Special Meeting of Stockholders sought stockholder approval for two different proposals: (a) the approval and adoption of the merger agreement between May and the Hall corporations (Proposal One), and (b) the amendment of May's certificate of incorporation to increase the authorized number of May common shares to 100 million (Proposal Two). The record indicates that 14,655,660 shares were entitled to vote at the special meeting of the stockholders, as of the record date. Of the 14,655,660 shares entitled to vote, 11,834,661 shares were represented at the meeting in person or by proxy, and were all counted as present for the purpose of establishing a quorum (80.8%). Hall controlled 3,675,359 of the shares represented at the meeting. Emerald did not attend the special meeting in person or by proxy. The Certificate of Judges of Voting reflects that the power to vote on Proposal One was withheld on 1,329,958 shares. The inspectors of election at the stockholders meeting counted 10,513,703 (11,843,661 minus 1,329,958) shares as voting power on Proposal One, with 9,934,172 of these shares voted in favor of the proposed merger, 432,796 opposed, and 146,735 abstained. [12] On Proposal Two, all 11,834,661 shares represented voted, with 11,151,902 shares voted in the affirmative, 485,912 voted against, and 161,747 abstained. Although the report of the inspectors of election is ministerial, it is presumed to be correct. Atterbury v. Consolidated Coppermines Corp., Del. Ch., 20 A.2d 743 (1941); Cf. Williams v. Sterling Oil of Oklahoma, Inc., Del.Supr., 273 A.2d 264 (1971). However, when the question is whether there was a quorum at the meeting, a court may inquire into the actual facts. Atterbury v. Consolidated Coppermines Corp., 20 A.2d at 748. The appellants argue that the inspectors of election were correct in deciding that there was a quorum consisting of 11,843,661 shares present in person or by proxy at the meeting. The appellants also argue that the inspectors of election were correct in deciding that only 10,513,703 shares represented had voting power with respect to Proposal One (the merger). Thus, the appellants argue that the voting judges properly used the larger number to determine whether or not the quorum requirements of Article Fourteenth had been met, and the smaller number to determine if the 66-2/3% voting power requirement of Article Fourteenth had been satisfied. The Court of Chancery concluded that there was no basis for combining the stockholders entitled to vote on both proposals for the purpose of determining a quorum and then separating the two proposals for the purpose of determining the amount of voting power present ... at such meeting. The Court of Chancery held that [e]ither there were only 10,513,703 shares present, and therefore, no 80% quorum, or there were 11,843,661 shares present and therefore, no 66-2/3% supermajority vote. In either case, the vote is invalid and the proposed merger may not be approved. Emerald Partners v. Berlin, Del. Ch., C.A. No. 9700, Hartnett, V.C., slip op. at 19 (March 18, 1988) [1988 WL 25269]. We disagree. The supermajority provision of Article Fourteenth addresses two different matters, i.e., what constitutes a quorum for meeting purposes and what constitutes the required vote on the particular Business Combination being proposed. The language of the May certificate of incorporation distinguishes between the presence of voting securities and voting power present. The quorum requirement under Article Fourteenth of May's certificate of incorporation is that not less than 80% of the voting securities of the corporation be present in person or in proxy. If a quorum is present, in order for the Business Combination to be approved, Article Fourteenth requires the affirmative vote of 66-2/3% of the voting power present, in person or by proxy. If a stockholder is not present in person, and if he has not given a proxy to vote on the proposed Business Combination, his stock cannot be regarded as voting power present, for purposes of the vote required under the supermajority provision. The distinction set forth in the May certificate of incorporation is recognized and permitted under Delaware law. Section 216 of the Delaware General Corporation Law expressly contemplates that the number of shares counted for quorum purposes need not necessarily be the same as the number of shares required to be present for voting purposes. Section 216 provides in relevant part: Subject to this chapter in respect of the vote that shall be required for a specified action, the certificate of incorporation or bylaws of any corporation authorized to issue stock may specify the number of shares and/or the amount of other securities having voting power the holders of which shall be present or represented by proxy at any meeting in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business, but in no event shall a quorum consist of less than one-third of the shares entitled to vote at the meeting. 8 Del.C. § 216 (Supp.1988) (emphasis added). Moreover, the succeeding sentence of Section 216 states: In the absence of such specification in the certificate of incorporation or bylaws of the corporation: (1) A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of stockholders; (2) 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;.... Id. (emphasis added). Section 216 evidences both a legislative recognition of and an authorization for corporations to differentiate between the greater universe of voting shares which are necessary to satisfy a quorum requirement and the universe of shares present in person or by proxy entitled to vote on the subject matter. 8 Del.C. § 216; Providence and Worcester Co. v. Baker, Del.Supr., 378 A.2d 121 (1977); see also, 1, E. Folk, R. Ward & E. Welch, Folk on the Delaware General Corporation Law, § 216.1-.3 (2d ed. 1988). The recognition of these different universes is a corollary to a stockholders right not to attend a meeting, his right not to vote on any matter, even if he is in attendance, and his right to be represented by a general or a limited proxy. Under Delaware law, a stockholder has no obligation to attend a meeting. In re Pioneer Drilling Co., Del. Ch., 130 A.2d 559 (1957). However, it is also firmly established that stockholders who are present at a meeting are properly counted in the determination of a quorum even though the shares are not voted. Duffy v. Loft, Inc., Del. Ch., 151 A. 223, aff'd, Del.Supr., 152 A. 849 (1930). But see Leamy v. Sinaloa Exploration & Development Co., Del. Ch., 130 A. 282 (1925). A stockholder can be present for quorum purposes and yet not vote, because a stockholder has a right to attend the meeting but has no legal duty to vote at all. Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, Del.Supr., 53 A.2d 441, 447 (1947). It follows logically that a stockholder who is present in person at a meeting has a right to withhold his vote on any particular proposal and, in fact, can leave the meeting. However, a stockholder who is counted in reaching a quorum, cannot defeat the quorum, once established, by not voting or by walking out of the meeting. Duffy v. Loft, Inc., Del.Supr., 152 A. 849, 853 (1930). [13] A stockholder also has the right to be represented at a meeting by giving a general or a limited proxy. 8 Del.C. § 212. [T]he presence of holders of proxies at a meeting renders the shares that they represent present for purposes of a quorum, regardless of whether the written proxies are produced. 1, R.F. Balotti & J. Finkelstein, The Delaware Law of Corporations and Business Organizations § 7.15 at 361 (citing Atterbury v. Consolidated Coppermines Corp., Del. Ch., 20 A.2d 743 (1941); Hexter v. Columbia Baking Co., Del. Ch., 145 A. 115 (1929); Hauth v. Giant Portland Cement Co., Del. Ch., 96 A.2d 233 (1953)). See also, Duffy v. Loft, Inc., 152 A. at 852-53. Just as the quorum once established, will not be defeated by a stockholder who participates in part of the meeting but does not vote or leaves the meeting, it also will not be defeated merely because the stockholder who is present by proxy did not provide authority for his representative to vote on all proposals. See Duffy v. Loft, Inc., 151 A. at 226-28. Nevertheless, a stockholder who is present by proxy for quorum purposes may not be voting power present for all purposes. Voting power present is synonomous with the number of shares represented which are entitled to vote on the subject matter. 8 Del.C. § 216(2) (Supp. 1988). A stockholder who is present in person or represented at a meeting by a general proxy, is present for quorum purposes and is also voting power present on all matters. However, if the stockholder is represented by a limited proxy and does not empower its holder to vote on a particular proposal, then the shares represented by that proxy cannot be considered as part of the voting power present with respect to that proposal. Therefore, unless the certificate of incorporation provides to the contrary, the legal and practical effect of executing a limited proxy is that a stockholder will contribute to the establishment of a quorum and will be bound by a majority decision of the voting power present on a proposal from which he has withheld the authority to vote. 8 Del.C. §§ 212, 216 (1983 & Supp.1988). That choice is for each stockholder to make. In making that choice, each stockholder must evaluate the advantages and disadvantages of a limited proxy. That choice is often made, and its practical effects are frequently seen, when a stockholder decides that it is not convenient to be the holder of record of his own stock. See 8 Del.C. § 262 (1983 & Supp. 1988). Shares of publicly traded corporations are often held in the name of brokers or fiduciaries (commonly called street name) for the account of the beneficial owners. The brokers or fiduciaries are the stockholders of record. Delaware law expressly recognizes the right of the corporation to rely upon record ownership, not beneficial ownership, in determining who is entitled to notice of and to vote at the meetings of stockholders. See, 8 Del. C. § 213(a) (Supp.1988); Enstar Corp. v. Senouf, Del.Supr., 535 A.2d 1351, 1356 (1987). [I]n dealing with its stockholders a Delaware corporation need not look beyond the registered owners. Williams v. Sterling Oil of Oklahoma, Inc., Del. Ch. 267 A.2d 630, 634 (1970), rev'd on other grounds, Del.Supr., 273 A.2d 264 (1971). Therefore, from the perspective of the Delaware corporation, a broker who is the stockholder of record, has the legal authority to vote in person or by proxy on all matters. Nevertheless, the relationship between a broker, who is the record owner, and the beneficial owner is governed by the rules of the various stock exchanges. [14] American Hardware Corp. v. Savage Arms Corp., Del.Supr., 136 A.2d 690 (1957). In certain instances, the brokers may vote the street name stock in their own discretion. However, with respect to other matters, such as the merger proposal presented to the May stockholders, the brokers must obtain specified instructions from the beneficial owner before the broker can vote, or give a proxy, on these nondiscretionary matters. [15] These stock exchange rules further provide that where a proxy form contains both discretionary and nondiscretionary proposals, the broker may vote, or give a proxy to vote, in the absence of instructions from the beneficial owner if the broker physically crosses out those portions where it does not have discretion. [16] However, where a proposal is nondiscretionary and the broker or fiduciary record holder receives no instructions from the beneficial owner, voting power on that proposal has been withheld. The shares represented by a limited proxy cannot be considered as part of the voting power present on a nondiscretionary proposal from which power has been withheld by crossing it out or otherwise. We find that the inspectors of election properly excluded the 1,329,958 shares, as to which voting power was withheld on Proposal One (the merger), from the universe of voting power present to which the supermajority standard applied. [17] Cf. Fradkin v. Ernst, 571 F.Supp. 829, 840 (N.D.Ohio 1983); Bank of New York Co. v. Irving Bank Corp., 140 Misc.2d 508, 531 N.Y.S.2d 730 (N.Y.Sup.Ct.), aff'd, 533 N.Y. S.2d 411 (N.Y.A.D. 1 Dept.1988). We also find that the inspectors of election were correct in counting all voting securities which were represented in person or by proxy at the meeting as present for purposes of the greater universe or the quorum requirement set forth in Article Fourteenth. Once a quorum was established, Article Fourteenth provided that 66-2/3% of the voting power present (those entitled to vote on the subject) had to vote affirmatively to approve the merger. Accordingly, we conclude that the quorum requirement and the voting power provision of Article Fourteenth were correctly applied and were, in fact, satisfied in this case. For this alternate reason, the decision of the Court of Chancery to enjoin the merger is REVERSED.