CORPORATELAW:THEINTERSECTIONOFSHAREHOLDERVOTINGRIGHTS WITHAMERICANPOLITICS

ByMiaoSun

From making a policy change to proposing a new position, corporate voting (i.e. shareholder voting) dictates the formation of a corporation and underpins the corporation’s representative democracies. Shareholder voting rights are fundamental to investor protection, especially in quantitative settings. The right concerns a shareholder’s ability to have a meaningful impact on business situations, proposals, and management of the board ofdirectors, managers, and shareholders. Shareholders have limited power to initiate an action despite their approval/veto powers. Shareholders’ voting powers center on their ability to make choices “as means of error correction for decisions” (Thompson and Edelman 2009). AccordingtoLaPorta et al. (1997),shareholderswithvotingrightsthatmostpowerfullyamplifytheirpowerwithinthe corporation show stronger capital market performance. Similarly, corporations with higher shareholder engagement display better corporate governance and management standards. This paper will give a general description of the fundamentals of shareholder power under current corporate laws, and then provide an analysis of the differences and intersections between shareholdervotingrightsandvotingwithinAmericanpolitics.

To understand shareholders' power in corporate voting, we must examine shareholders’ overallscopeofpower,responsibility,andrestrictionsinacorporatesetting.Shareholdersarenot plenary owners of corporations or corporate decision-makers. Shareholders have a limited governance role, and their power is set to voting. The lack of shareholder power to initiate an action restricts shareholder power to approve or veto an established set of corporate changes/proposals. Shareholders also do not have the power to veto transactions that fundamentally change the business operation of a corporation. Through voting, they approve or deny the passage of fundamental transactions in a corporation such as mergers, asset sales, dissolution, and charter amendments. They also have the power to make recommendations, amend the bylaws, right to sue, and right to sell.Alloftheserightsandpowerarecloselytiedto their rights of voting – to approve or protest their ideals. Their right to sell their share of the corporation sets a value for such power: a value that can be transactionally exchanged and fundamentally impact the policies of a corporation. Most corporations follow a basic procedure where a record date would be set, and shares would be counted at a set date, with only record holders' votes. On the record date, all the shareholders will be tabulated as record holders, and become eligible to vote in the upcoming special meeting. The majority of states' corporations follow a majority Quorum, which regulates the numberofshareholdersthatmustshowuptothe meeting for the meeting to be effective, requiring more than 50% shares for a meeting to take effect. However, in Delaware, there is a minimum of 1/3 shares to be present forthemeetingto be effective. Delaware’s policies make shareholder voting easier and protect shareholder rights against potential situations. In addition to the traditional in-person shareholder voting, shareholders can also vote byproxy–thisiscalledproxyvoting.Theshareholderwouldappoint a revocable agent to vote at the meeting for them, and the proxy could have a discrete or a mandatetovoteacertainway

In traditional shareholder voting theories, the shareholder’s vote-casting process in electing a director parallels the citizen's election of a congressional representative. Traditional ideologies of the corporate governance system recurrently consider corporations as representative democracies that enforce their legitimacy through representing the shareholders with directors. However, recent debates revolutionize traditional voting theories by proving that the shareholder franchise in corporate management is much more restricted compared to voters engaging in political elections. Thompson and Edelman argue that such restriction derives because the market for shares permits and promotes “a formofintensityvotingandletsmarkets mediate the outcome in a way that would be foreign to public settings.” The nature of shares allows corporate “voters” to purchase and sell shares based on the intensity they feel towards a corporate matter,unlikepoliticalelections,when“evenourrichestpresidentialcandidatescannot directly buy such power over the electorate” (2009). The economicdrivecomplicatesthevoting dynamic in corporate realms.Theconceptofshareholdersexpressingtheiropinionsoncorporate managementdecisionsbysellingorpurchasingsharesisalsoknownasthe“WallStreetrule.”

Anotheraspectthatdifferentiatesshareholdervotingfromvotinginpoliticalsettingsisits emphasis on shares instead of shareholders. Voting in political settings tends to highlight its fairness with “One person, one vote.” Yet corporate voting’s ties to intense voting and its economic underpinning prevent it from aligning with political voting to this end. According to scholar David Ratner, early American corporate law at timespermits“onevotepershareholder” (1970). However, the theory would only be appropriate for smaller corporations with a limited number of shareholders who arefamiliarwitheachother Inaddition,smaller,closecorporations also restrict the market for shares, which subsequently diminishes some of the economic drives incorporatevotingasthepreviousparagraphstated(Ratner1970).

In addition, shareholder voting is not the ultimate source of corporate authority. At its design, shareholder voting is not to be a plenary governance mechanism, despite the board of directors being provided with management authorities. Thepoweroftheshareholdersinmaking an impact on corporate governance is less than what is typically expected. For example, in the case of electingdirectors,thenomineesaretypicallypresentedbytheboarditself,andelectedon a simple plurality voting method. Under most state laws, plurality voting is a default rule in corporate voting. In this case, if all shareholders but one decided to withhold their votes to express their dissatisfaction with the nominee, the nominee would still be elected. With such logical underpinnings, the market permits a “low-cost exit to those who disagree with current corporate policy and exit choice that is much less costly than what may exist in the public setting”(ThompsonandEdelman2009).

Do these limitationsquestionthesignificanceofshareholdervotingincorporatesettings? The answer is purely empirical. Shareholder voting provides, overall, more benefits than drawbacks. An example of its significance is its facilitation ofcorporatetakeovers–anofferfor stocks enables the buyer to “assume control of the target by exercising the votes attachedtothe acquired shares” (Easterbrook and Fischel 1983). In addition, it provides a price increase that persistseveniftheinsurgentsaredefeated.

Though seemingly overlapping, corporate voting and political voting have adverse differences that lie in both their incentives and their products. Understanding the role that the market plays in a voting context helps us better understand the mechanism of corporate voting and how its laws impact a shareholder’s decision-making in comparison to political decision-making. The comparison of the two revolutionizes traditional corporatevotingtheories and proves thatitoverestimatesshareholderimpactoncorporategovernanceandmanagement.It spurs new research possibilities on the difference between political and corporate voting engagement and their ties to policy making. Such clarification is especially salient in our modern-day world in fostering higher voting literacy among citizens in both the business and politicalrealms.

Easterbrook,FrankH.,andDanielR.Fischel.1983.“VotinginCorporateLaw.” The Journal of Law & Economics 26(2):395–427.

LaPorta,Rafael,FlorencioLopez-De-Silanes,AndreiShleifer,andRobertW.Vishny.1997. “LegalDeterminantsofExternalFinance.” The Journal of Finance 52(3):1131–50.

https://doi.org/10.2307/2329518

Ratner,David.1970.“GovernmentofBusinessCorporationsCriticalReflectionsontheRuleof OneShareOneVote.” Cornell Law Review 56(1):1–56.

Thompson,Robert,andPaulEdelman.2009.“CorporateVoting.” Vanderbilt Law Review 62(1): 127–76.