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Each year at this time, we are often asked for our views with respect to the proper treatment under Maryland law of abstentions and "broker non-votes" in proxy statements and at meetings of shareholders of Maryland corporations and real estate investment trusts. (Because the same principles generally apply to both corporations formed under the Maryland General Corporation Law ("MGCL") and to real estate investment trusts formed under the Maryland REIT Law ("MRL"), we shall refer hereafter only to corporations.)

The MGCL, like most corporation statutes, does not deal specifically with the issue of abstentions and broker non-votes. Section 2-506(a)(1) of the MGCL provides that, unless otherwise provided by statute or the charter, a quorum for a stockholders meeting consists of "[t]he presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting . . . ." Under MGCL §2-506(c), in the absence of a contrary provision in the charter, registered open-end investment companies and corporations having a class of equity securities registered under the Securities Exchange Act of 1934 (the "1934 Act") and at least three independent directors may lower the quorum by provision in the bylaws to not less than one-third of the votes entitled to be cast at the meeting.

With three exceptions -- special voting requirements for certain business combinations with "interested stockholders" (see MGCL §3-602(b)), approval of voting rights for control shares acquired in a control share acquisition (see MGCL §3-702(a)(1)) and separate class voting (see MGCL §§2-406(b) and 2-506(b)) -- there are four different statutory levels of vote requirements in the MGCL, depending on the matter for which the vote is taken:

  1. Election of directors (MGCL §2-404(d)) -- Plurality of all the votes cast at a meeting at which a quorum is present. No counterpart in the MRL.
  2. Removal of a director (MGCL §2-406(a)) -- Majority of all the votes entitled to be cast for the election of directors (unless the corporation has elected to be subject to Section 3-804(a)). MRL counterpart: §8-205.
  3. Charter amendment (MGCL §2-604(e)); merger, transfer of all or substantially all of the assets, consolidation or share exchange (MGCL §3-105(e)); and dissolution (MGCL §3-403(d)) -- Two-thirds of all the votes entitled to be cast on the matter. MRL counterpart for amendment of declaration of trust and merger: §§8-501(d) and 8-501.1(g), respectively; no counterparts for transfer of assets, consolidation, share exchange or dissolution.
  4. All other matters (MGCL §2-506(a)(2)) -- Majority of all the votes cast at a meeting at which a quorum is present. No counterpart in the MRL.

In each of the foregoing situations, the vote required may be altered by provision in the charter or, in the case of the plurality vote requirement for the election of directors, in the bylaws as well. When there is no counterpart in the MRL, the provisions of the declaration of trust or the bylaws will determine the vote required.

In addition, other laws or rules may impose different vote requirements. For example, Section 312.03 and .07 and Section 303A.08 of the New York Stock Exchange Listed Company Manual (the "Listed Company Manual") require the approval of a majority of votes cast on the proposal, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal, for equity compensation plans (subject to certain exceptions) and certain issuances of securities.

1. Abstentions. Under MGCL §2-506(a)(1), unless the charter provides otherwise, a quorum is determined by counting the number of shares held by persons who are present "in person or by proxy." A stockholder who is physically present at a meeting should be counted as "present" for purposes of determining the existence of a quorum, whether or not the stockholder votes. The same rule applies to a stockholder who is "present . . . by proxy . . . ." That is, if a stockholder returns a properly executed proxy or otherwise authorizes a proxy (and the proxy holder attends the meeting or properly submits the proxy), he or she should be counted as present "by proxy," whether he or she votes on all matters, only some matters or no matters at all or affirmatively checks the box marked "withhold authority" as to directors or "abstain" as to one or more other matters. An abstention is always counted as present and entitled to vote because presence and entitlement to vote are necessary to the act of abstaining.

With respect to the counting of votes, an abstention is not a vote cast. Larkin v. Baltimore Bancorp, 769 F.Supp. 919, 921 n.1 (D. Md.), aff'd, 948 F.2d 1281 (4th Cir. 1991). The New York Stock Exchange, however, takes an unwritten position that abstentions are votes cast with respect to those matters for which stockholder approval is a prerequisite to the listing of shares under Section 312 of the Listed Company Manual.

If the vote required is either a plurality (see (a) above) or majority (see (d) above) or other percentage of the votes cast, an abstention will have no effect because it will not be a vote cast. If the vote required is either a majority (see (b) above), two-thirds (see (c) above) or other percentage of all the votes entitled to be cast, the effect of an abstention will be the same as a vote against the proposal because an absolute percentage of affirmative votes is required, regardless of how many votes are cast, and neither a negative vote nor an abstention is an affirmative vote.

2. Broker Non-Votes. Many shares of public companies are held of record in "street" or nominee name and the record holders are required to provide proxy materials to the beneficial owners and to seek instructions with respect to the voting of those securities. Rule 452 of the New York Stock Exchange permits a broker member to vote on certain routine, uncontested matters, including, until recently, uncontested director elections, without instructions from the beneficial owner of the shares. As a result of an amendment to Rule 452 approved by the SEC in 2009, brokers are no longer permitted to vote without instructions in uncontested director elections.1 Section 402.08(B) of the Listed Company Manual also lists various matters as to which a broker member may not vote or give any proxy without instructions from the beneficial owner. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), this rule and section were recently amended to prohibit discretionary voting by brokers on any matter that relates to executive compensation, including the advisory votes on executive compensation mandated by Dodd-Frank.

Votes that, in accordance with stock exchange rules, are not cast by the broker (assuming the broker does not affirmatively abstain) on non-routine matters are known as "broker non-votes." If the broker (through Broadridge or another agent) does not return a properly executed proxy, then that is treated the same as any other stockholder who does not appear at the meeting in person or by proxy, i.e., the holder is not present for purposes of a quorum and the effect of this act on the result of the vote on each proposal depends upon whether the vote requirement for that proposal is based upon a proportion of the votes cast (no effect) or a proportion of the votes entitled to be cast (effect of a vote against). If the broker returns a properly executed proxy but does not vote on the non-routine item on the proxy, then the holder is present for quorum purposes and the effect of not voting depends upon whether the vote requirement for that proposal is based upon a proportion of the votes cast (no effect) or a proportion of the votes entitled to be cast (effect of a vote against).2

Item 21(b) of Schedule 14A of the SEC's Proxy Rules requires disclosure only of "the method by which votes will be counted, including the treatment and effect of abstentions and broker non-votes under applicable state law as well as registrant charter and by-law provisions." While Item 21(b) does not specifically require disclosure of the effect of abstentions and broker non-votes on the determination of a quorum, many companies make that disclosure anyway. It should also be noted that Item 5.07 of Form 8-K requires disclosure of the results of each matter voted upon by the stockholders, broken down into the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter. If the company initially discloses preliminary voting results, it must file an amended Form 8-K within four business days after the final results are known.

Considering the requirements of the federal securities laws, Maryland law and the New York Stock Exchange, we recommend for Maryland corporations the forms of disclosure set forth below, which may be varied appropriately in accordance with the proposal and the applicable vote requirement. The bracketed language on quorums is not required by Item 21(b), but is often disclosed, as noted above. N.B.: Be sure to check that the following statutory vote requirements have not been altered by provision in the charter or bylaws.

Election of Directors by Plurality Vote

The vote of a plurality of all of the votes cast at a meeting at which a quorum is present is necessary for the election of a director. For purposes of the election of directors, abstentions and broker non-votes, if any, will not be counted as votes cast and will have no effect on the result of the vote[, although they will be considered present for the purpose of determining the presence of a quorum].

Election of Directors by "Majority Voting"

The vote of a majority of the total of votes cast for a nominee and [votes affirmatively withheld as to] or [votes against]3 a nominee at a meeting at which a quorum is present is necessary for the election of a director. For purposes of the election of directors, abstentions and broker non-votes, if any, will not be counted as votes cast and will have no effect on the result of the vote[, although they will be considered present for the purpose of determining the presence of a quorum]. [The foregoing disclosure is suggested in connection with adoption of one type of "majority voting" requirement in uncontested elections only.]

Approval of Extraordinary Action

The affirmative vote of two-thirds of all of the votes entitled to be cast on the matter is required for approval of the proposed [charter amendment, merger, etc.] . For purposes of the vote on the proposed [charter amendment, merger, etc.] , abstentions and broker non-votes will have the same effect as votes against the proposal[, although they will be considered present for the purpose of determining the presence of a quorum].

Approval of Non-Extraordinary Action

The affirmative vote of a majority of all of the votes cast at a meeting at which a quorum is present is required for approval of [specify proposal] . For purposes of the vote on the [specify proposal] , abstentions [and broker non-votes -- N.B.: include this phrase only if the vote is on a non-routine matter] will not be counted as votes cast and will have no effect on the result of the vote[, although they will be considered present for the purpose of determining the presence of a quorum].

Approval of Advisory Vote on the Frequency of an Advisory Vote on Executive Compensation4

The option of one year, two years or three years that receives a majority of all the votes cast at a meeting at which a quorum is present will be the frequency for the advisory vote on executive compensation that has been recommended by stockholders. For purposes of this advisory vote, abstentions and broker nonvotes will not be counted as votes cast and will have no effect on the result of the vote[, although they will be considered present for the purpose of determining the presence of a quorum]. In the event that no option receives a majority of the votes cast, we will consider the option that receives the most votes to be the option selected by stockholders. In either case, this vote is advisory and not binding on the Board or the Company in any way, and the Board or the Corporate Governance Committee may determine that it is in the best interests of the Company to hold an advisory vote on executive compensation more or less frequently than the option recommended by our stockholders.

Approval of Transaction under Section 312.03 of the Listed Company Manual

The affirmative vote of a majority of the votes cast on the proposal is required for approval of [specify proposal] , provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal. For purposes of the vote on [specify proposal] , abstentions will have the same effect as votes against the proposal and broker non-votes will have the same effect as votes against the proposal, unless holders of more than 50% in interest of all securities entitled to vote on the proposal cast votes, in which event broker non-votes will not have any effect on the result of the vote. [N.B.: The prior sentence depends on interpreting the words "entitled to vote" not to exclude broker non-votes and, therefore, to include them in the denominator. We have confirmed this interpretation, which is consistent with the MGCL, with the New York Stock Exchange. The treatment of abstentions as having the effect of a vote against the proposal is appropriate only if adhering to the unwritten New York Stock Exchange policy that abstentions are votes cast; an abstention is not a vote cast for Maryland law purposes.] [Both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.]

Approval of SEC Rule 16b-3 Plan (Other Than a Discretionary Transaction)

The affirmative vote of the holders of a majority of the shares [or other securities] present (or represented) and entitled to vote at the meeting is required for approval of the proposed [specify name of employee benefit plan or describe specific transaction being submitted pursuant to Rule 16b-3(d)(2)] . For purposes of the vote on the proposed plan, abstentions will have the same effect as votes against the proposed [plan] [transaction] and broker non-votes will not be counted as shares entitled to vote5 on the matter and will have no effect on the result of the vote. [Both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.]

Approval by a 1940 Act Majority

The approval of the proposal requires the affirmative vote of the holders of a "majority of the outstanding voting securities" of the Fund as defined in the Investment Company Act of 1940, which means the lesser of (i) 67% or more of the voting securities of the Fund present or represented at the meeting, if the holders of more than 50% of the Fund's outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities of the Fund. For purposes of the vote on the proposal, abstentions and broker non-votes will have the effect of votes against the proposal[, although they will be considered present for purposes of determining the presence of a quorum].

Footnotes

1. This rule change does not apply to director elections for investment companies registered under the Investment Company Act of 1940 (the "1940 Act"). Strangely, closed-end investment companies that elect to be treated as business development companies under the 1940 Act were not included in this exception.

2. An SEC no-action letter issued to the American Bar Association in 1993 takes the position that for Rule 16b-3(d) purposes "broker non-votes should not be considered shares entitled to vote because the broker and proxy holder do not have the authority to vote the shares with regard to the plan." American Bar Ass'n, SEC No-Action Letter, 1993 SEC No-Act. LEXIS 782 (June 24, 1993). A different result might be reached under state corporation law. For example, similar language in the MGCL (e.g., "votes entitled to be cast on the matter," see MGCL §2-604(e) (re charter amendments)) means the total votes to which the total outstanding shares are entitled. Compare Berlin v. Emerald Partners, 552 A.2d 482, 491-95 (Del. 1988).

3. In our experience, negative voting in the election of directors has been a relatively rare practice among Maryland corporations. However, given the increase in recent years of various forms of majority voting in the election of directors, bylaws contemplating votes against a nominee are becoming more common. There is nothing in the MGCL (or the MRL) that would prohibit such a provision.

4. Dodd-Frank and SEC rules adopted on January 25, 2011 generally require 1934 Act reporting companies to hold an advisory vote on executive compensation at least every three years. The vote for this proposal would be the vote for a non-extraordinary action set forth above. Additionally, Dodd-Frank and the SEC rules require an advisory vote on the frequency of the advisory vote on executive compensation not less frequently than every six years, in a multiple choice format of one, two or three years.

5. See note 2, above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.