Supermajority Vote Requirements

"Lock-in" votes: charter and bylaws

Supermajority shareholder vote requirements for charter or bylaw amendments are often the result of "lock-in" votes, which are the votes required to repeal new provisions to the charter. For instance, an amendment to classify a firm's board of directors may be accompanied by a lock-in provision requiring that a supermajority shareholder vote (usually between two-thirds and 80 percent) be necessary to declassify the board. Lock-in provisions typically accompany amendments that are harmful to shareholders. Very few companies require that all charter and bylaw amendments receive the support of a supermajority of voting shares.

Impact of supermajority provisions

Supermajority provisions violate the principle that a simple majority of voting shares should be all that is necessary to effect change regarding a company and its corporate governance provisions. Requiring more than this may permit managements to entrench themselves by blocking amendments that are in the best interests of shareholders.

That aside, supermajority provisions can have a future backlash on managements as well. Sealed Air Corp., for example, inherited an 80-percent lock-in from its predecessor company before merging with a unit of W.R. Grace & Co. After three attempts, including two adjournments of the 1999 annual meeting to solicit additional proxies, Sealed Air was finally able to garner the 80-percent approval threshold to repeal its classified board, reestablish written consent, and allow shareholders to amend the bylaws with a simple majority vote.

Supermajority votes to approve mergers

Shareholders should similarly oppose supermajority vote requirements to approve mergers and other business combinations. As a matter of principle, shareholder desires should be carried out with a majority vote of the disinterested shares. There are also practical reasons to oppose supermajority vote requirements. For example, irregularities in the proxy system (proxies that are never received by shareholders or that arrive too late for a vote, and proxies that are invalidated for bearing the wrong signatures) and the growing size of management and ESOP holdings, may make a supermajority requirement unreachable at times for purely technical reasons. The difficulty shareholders may experience in approving a merger beneficial to them contributes to the entrenchment of management.

Unrestrictive fair price provisions

An alternative to the supermajority vote requirement for mergers is an unrestrictive fair price provision. Such a provision ensures that shareholders receive fair compensation for their shares in the event of a merger, and, when not combined with a restrictive shareholder vote requirement, does not significantly contribute to the entrenchment of management.

This is confirmed by a 1999 study by three academics which concludes that supermajority rules discourage a potential acquirer from embarking on a takeover process, but only when a rival bidder might contest the offer-precisely the situation that could generate the greatest economic gain for shareholders. Fair price provisions, on the other hand, ensure that rival bidders who place a higher value on the target than the initial bidder will enter the contest, resulting in the prospect of more value being delivered to investors. Hence, the study demonstrates that supermajority clauses are unambiguously poor policy while fair price provisions may not be.[1]