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The SEC's New C&DI And Cumulative Voting

Last Friday, the staff of the Securities and Exchange Commission issued 45 new Compliance & Disclosure Interpretations relating to proxy solicitations and related schedules.  One of these dealt with the issue of cumulative voting:

Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?

Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]

The California Corporations Code is famously attached to cumulative voting, leading to the question of whether this C&DI will apply to those California corporations that have not amended their articles of incorporation to eliminate cumulative voting.  The C&DI imposes two conditions. 

First, state law must grant the proxy holder the authority to exercise discretion to cumulate votes.  Corporations Code Section 604 imposes certain restrictions on the form of proxies distributed to 10 or more shareholders of a corporation with outstanding shares held of record by 100 or more persons.  However, the statute does not apply to any corporation with an outstanding class of securities registered under Section 12 of the Securities Exchange Act of 1934 or whose securities are exempted from registration pursuant to Section 12(g)(2).  Corporations Code Section 705 generally authorize actions by proxy.  Thus, the question is whether this general authorization constitutes the requisite grant of authority under the C&DI.

Second, state law must not require separate security holder approval with respect to cumulative voting.  Corporations Code Section 708 does not condition cumulative voting on separate security holder approval.  All that is required is that the candidates names be placed into nomination prior to voting and a shareholder give notice at the meeting (again prior to the voting) of the intention to cumulate votes.

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