Last week, the Securities and Exchange Commission adopted its final changes to the federal proxy rules. These new rules will require public companies, under specified circumstances, to include in their proxy materials information about, and the ability to vote for, a shareholder's (or shareholder group's) nominee(s) for director. In adopting these rule changes, the SEC expressly declined to allow for the exclusion of shareholder nominees who do not meet a corporation's director qualification requirements.
The California General Corporation Law does not specify any qualifications for election and service as a director. However, Corporations Code Section 212(b)(4) does authorize a corporation to include in its bylaws a provision (to the extent not in conflict with law or the articles) specifying the qualifications of directors. For example, a bylaw could require that a director be a shareholder. There may also be regulatory or other reasons for imposing particular qualifications.
What happens when a shareholder nominates someone who doesn't meet the qualification requirements of the bylaws? The SEC's rule changes will require that the nominee be included in the corporation's proxy materials and in its proxy card. Thus, proxy holders will be obligated to vote in accordance with those instructions. However, a proxy card is not a vote and voting occurs at the meeting itself. The SEC seems to have recognized this principle in the adopting release ("We note that state law will control what happens if a candidate is not nominated at the meeting because the person supporting the candidate does not attend the meeting or make other arrangements." The SEC's adopting release also encourages disclosure in the proxy statement if a corporation's charter documents would preclude the corporation from seating a director who fails to meet specified qualifications.
But what should the company do at the meeting? One approach is for the chairperson to rule on whether a nominee's name can be properly brought before the meeting for a vote. This approach is entirely consistent with the idea that a person who does not meet the qualifications for service as a director is not entitled to be elected. This approach appears to be in accord with case law. Waterbury v. Temescal Water Co., 11 Cal. App. 632 (1909) (applying former law). If the corporation allows a vote on the unqualified candidate and the candidate receives a sufficient number of votes to win a seat on the board, then there is likely to be even more confusion because the General Corporation Law does not specify any mechanism for "seating" board members. Whatever approach is followed, the corporation would be wise to spell it out in the proxy statement as suggested by the SEC in the adopting release.
California does provide an expedited judicial process for determining the outcome of elections in Corporations Code Section 709. However, that process must be initiated by a shareholder "or any person who claims to have been denied the right to vote". By its terms, therefore, the procedure is not available directly to either the corporation or a nominee who is not also a shareholder.
