Corporate Governance

City of Westland v. Axcelis Technologies: Majority Voting and Delaware Law (Plurality Plus v. Majority Vote)

By J. Robert Brown

We are discussing CITY OF WESTLAND POLICE & FIRE RETIREMENT SYSTEM v. AXCELIS TECHNOLOGIES, INC., a case involving the invocation of inspection rights to investigate the reasons why the board of directors of Axcelis did not accept the resignation of three directors who failed to receive majority support from shareholders voting in the eleciton.

In the JOINT PRETRIAL ORDER, under the section on facts to be litigated, plaintiff asserted that only one other company with a Pfizer style majority vote bylaw has rejected a director who did not receive a majority of the votes cast.  Id. at 10 ("Besides Axcelis, only one other company – Pulte Homes – has used a Pfizer-style majority voting policy to reject the results of a shareholder vote for director elections.").

A Pfizer-style provision, sometimes referred to as "plurality plus" and other times as "majority voting lite," requires that a director receiving a plurality but not a majority resign.  The decision whether to accept the resignation becomes a discretionary decision for the board.  The provision (contained in the Company's Corporate Governance Principles) can be found here. 

It can be contrasted with the model first adopted by Intel where a nominee is not elected unless receiving a majority of the votes cast.  For those directors on the board who do not receive a majority of the votes, they must submit a letter of resignation (apparently in advance, see Guideline 12 of Intel Corporation Board of Director Guidelines on Significant Corporate Governance Issues).  It then falls to the board to decide whether or not to accept the resignation. 

Of course, not many directors have failed to receive a majority under either set of provisions.  According to RiskMetrics, only 32 directors at 17 companies in the Russell 3000 index did not receive a majority. Assuming each company has on average 8 directors, that means that 1/10th of a percent of directors did not receive a majority.  The stats are even more rare for S&P companies, as RiskMetrics notes ("It's extremely rare for a director at an S&P 500 firm like Pulte to receive majority opposition in an uncontested board election. That happened at two S&P 500 companies (Cameron International and Boston Properties) in 2008"). 

All of these elections occurred before the recent amendment to NYSE Rule 452.  NYSE brokers will not be able to vote discretionary shares (those where street name owners did not return voting instructions) for directors.  This will result in the loss of a sizable and consistently pro-management block of votes.  As a result, the number of directors (both nominees and incumbents) not receiving a majority should increase, causing the letter of resignation issue to become even more important.

The complaint and other primary materials are posted on the DU Corprate Governance web site.

Full post as published by The Race to the Bottom on July 21, 2009 (boomark / email).