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My Director or Shareholder decided to “abstain” from a vote. What does this mean for my company?

As attorneys, we often talk to directors about abstaining.  For example, if a board of directors has to make a decision about something – say, whether or not the company should lease specific office space – and a director has a personal conflict of interest in the decision – say, she is a part owner of the LLC that owns the property – we may advise the conflicted director to “abstain” from voting on the decision.  This is one way a director can deal with a conflict of interest consistently with her fiduciary duties.  By abstaining, the director prevents her personal interest from affecting the validity of the board’s decision. 

Similarly, shareholders may “abstain” from a shareholder vote. For example, when a board decides that the company should be sold, which is discussed in more detail below, shareholder approval is likely required by statute in order to proceed with the sale. Directors may call a special shareholders meeting at which the shareholders vote on the proposed transaction.  Shareholders will receive proxy materials for the meeting, and will be asked to submit a proxy form directing their shares to be voted “for” or “against” the proposed transaction.   Sometimes the proxy materials will also give the shareholder the option to “abstain” from the vote. 

But what does it mean when a director or shareholder abstains?

An “abstention” is simply a voter’s (shareholder or director) decision not to vote.  This means that, except in the limited scenarios discussed below, the abstention does not count as a “yes” or “no” vote.  The abstention is treated as “this director or shareholder is not voting.” 

The typical director abstention could look like this.

  1. 9 member board.
  2. All 9 are at a meeting.
  3. The action at hand requires majority approval.
  4. If all 9 directors vote, the action will be approved only if at least 5 directors vote “yes”.
  5. But 2 directors abstain from the vote.
  6. This means you only have 7 directors voting on the action.
  7. You would only need 4 “yes” votes in order to move forward with the action.  Even though all 9 directors are at the meeting, you only need 4 “yes” votes to approve the action because only 7 of those directors are actually voting.

There are scenarios when an abstention, although it is not counted as a “no” vote, has the same effect as a “no” vote.    At the director level, this can happen if a decision requires the approval of a majority of all directors serving on the board (not just a majority of the directors voting on the issue, which is the norm).  Here’s an example:

  1. Assume your bylaws contain this provision, which is fairly common:  “The number of Directors of the Corporation shall be not less than five (5) nor more than ten (10), the exact number of Directors to be determined from time to time by resolution adopted by a majority of the entire Board of Directors.”
  2. You have a 7 person board.  The provision above means that if the board wants to increase the number of director seats to 9, then at least 4 directors must approve the change.  This is true even if only 5 directors show up at the meeting where the board votes on the proposed increase in director seats.
  3. Because you need at least 4 directors to approve the increase, if 3 directors vote “yes”, 2 directors vote “no” and 2 “abstain”, the increase is not approved even though a majority of the directors participating voted “yes”.  Because you did not get the required 4 “yes” votes, the abstentions have the same effect as a “no” vote.

This can happen at the shareholder level as well. The general rule is that, as long as a quorum of shares are present at a meeting (usually a majority of the outstanding shares), shareholders approve things by a simple majority of the shares present and voting at the meeting.  For example:

  1. A decision requires simple majority approval of the shares voting.
  2. You have 10,000 outstanding shares.
  3. Shareholders holding 6,000 shares participate (in person or by proxy) at the meeting, so you have a quorum.
  4. You only need 3,001 shares to vote “yes” in order to have valid shareholder approval. 

Although counter-intuitive, this means an action can be validly approved in most situations even though far less than a majority of the outstanding shares actually approved the action.  If a shareholder “abstains” in this scenario, the abstention only means that even fewer “yes” votes will be needed to approve the action.

However, there are specific voting requirements under the statutes, and sometimes in a company’s articles and bylaws, which cause abstentions to have the same effect as voting “no.” For example:

  1. Under Wisconsin law, a merger or sale of a company usually requires approval of “a majority of all shares outstanding” (not a majority of those shares that show up to vote at a meeting). 
  2. You have 10,000 shares outstanding.
  3. Shareholders holding 6,000 shares participate (in person or by proxy) at the meeting, so you have a quorum.
  4. Even though only 6,000 shares are participating at the meeting, you need a full 5,001 shares to vote “yes” on the sale because 5,001 shares is “a majority of all 10,000 shares outstanding.”

The reason that an abstention works like a “no” vote here is: if 6,000 shares are present at the meeting, but shareholders holding 1,000 of those shares abstain from the vote, then the 5,000 shares that remain are simply not enough to reach the required 5,001 “yes” votes (even if 100% of them vote “yes”).  This is the same result as you would have if those 1,000 shares had instead voted “no” and the 5,000 shares had voted “yes.”

One question that comes up is whether an abstaining director should be counted when determining if there is a quorum at a board meeting.  Generally, the answer is yes. If a director is present at the board meeting where a vote is taken, the director is typically counted for purposes of determining whether there is a quorum even if she abstains.  This might come up, for example, if a board member is abstaining because she does not think she has enough information to make an informed decision, or because she thinks it is not the right time for the board to be voting on the issue.   

The quorum rule is different if the board is voting on a transaction involving one or more directors’ conflict of interest, and directors are abstaining because of the personal conflict. A conflict of interest transaction is approved if it receives the affirmative vote of a majority of the directors who have no direct or indirect interest in the transaction (known as “disinterested” directors). As long as a majority of the disinterested directors (which could be a very small subset of the board, or even just one director) approve the transaction, a quorum is deemed present regardless of the number of directors voting.

As with directors, the general rule for shareholders is  that if a shareholder’s shares are present (in person or by proxy) at a shareholder meeting, the shares are counted for purposes of determining whether there is a sufficient number of shares to hold a valid vote, even if the shareholder abstains from the vote.  One exception is when the shareholder’s shares are present at a meeting for the purpose of objecting to holding the meeting or to transacting business at the meeting.  Those shares would not be counted for purposes of determining a quorum.  A shareholder might object to a meeting, for example, if he thought that he did not get proper notice of the meeting.

Whether or not you have a quorum is important, because a vote is not valid if there is no quorum.  Typically, a majority of the sitting directors or a majority of the outstanding stock will be required for a quorum, although the articles or bylaws might require a higher threshold.  You should be sure to look at the quorum and voting requirements in the entity’s articles and bylaws, because you never know when somebody at some point thought a certain decision should require a majority of the entire board or a supermajority of the outstanding shares (such as “a majority of all shares outstanding” or a “3/4 majority of all participating shares”).

As a final recommendation, when putting together the formal corporate record of the vote, you should record abstentions and the names of the specific directors and shareholders who abstained.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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