Twenty-five years ago, in Williams v. Geier, 671 A.2d 1368 (Del. 1996), the Delaware Supreme Court heard a minority shareholder’s challenge to a certificate of incorporation amendment that Cincinnati Milacron’s board had recommended and that shareholders had voted to approve.
Similar to the amendment supported by a vote of J.M. Smucker Company shareholders in 1985, Milacron’s, which was allowed by Delaware General Corporation Law Sections 212(a) (authorizing departures from the default of one-share, one-vote) and 242(b) (enabling the amendment of certificates of incorporation), established “a form of ‘tenure voting’ whereby holders of common stock on the record date would receive ten votes per share. Upon sale or other transfer, however, each share would revert to one-vote-per-share status until that share is held by its owner for three years.” Id. at 1370.
In affirming the Court of Chancery’s judgment for the defendants, the majority of the Justices found that “the independent majority of the Board” was protected by the business judgment rule in recommending the amendment, and characterized as “dispositive” the approval of the amendment by “a fully informed majority of the stockholders.” Id. at 1371.
The Delaware Supreme Court saw no evidence “that a majority of the Board was interested or acted for purposes of entrenching themselves in office,” or that that they were “dominated or controlled by” a group of major shareholders. Id. at 1378.
Moreover, “Stockholders (even a controlling stockholder bloc) may properly vote in their own economic interest, and majority stockholders are not to be disenfranchised because they may reap a benefit from corporate action [here, the approval of the amendment] which is regular on its face.” Id. at 1380-1381.
The Court concluded that the shareholder plaintiff had not shown “that the Amendment and Recapitalization involved waste, fraud, or manipulative or other inequitable business conduct. Likewise, there is no showing that either the Recapitalization lacked a rational business purpose or that its sole or primary purpose was entrenchment.” Id. at 1384.
Few other decisions address “tenure voting,” also known as “time-phased voting” or as involving “loyalty shares.” Nor does the practice appear to have been adopted by many major domestic corporations.
Such arrangements have been proposed and promoted as a means of countering the influence of “short-term” shareholders who have, and who seek, no relationship with the company beyond making a fast profit.
However, as in the Williams decision, tenure voting raises concerns about solidifying the control of major shareholders, particularly if those shareholders also serve as directors and/or officers. In fact, one study reported that “when corporate management holds a large block of company stock prior to the implementation of tenure voting and retains at least 20-30% of the total number of company shares on a long-term basis,” it can effectively repel even “a highly motivated dissident shareholder who owns the maximum amount permitted by most poison pills.” Paul H. Edelman et al., Will Tenure Voting Give Managers Lifetime Tenure?, 97 Tex. L. Rev. 991, 995 (2019).
Indeed, one analysis found that although “the percentage of long-term shareholdings consistently trends downward following the adoption” of a tenure-voting arrangement, “on average, almost two-thirds of insiders’ shares were long-term shares—a much higher rate of long-term shareholding than outside shareholders exhibited. . . [I]nsiders controlled approximately 22% of outstanding votes while owning only 11% of outstanding shares.” Lynne L. Dallas & Jordan M. Barry, Long-Term Shareholders and Time-Phased Voting, 40 Del. J. Corp. L. 541, 550 (2016).
Yet the advantages to management of tenure voting might still be more palatable to institutional investors than a “dual-class voting” system in which management could, by holding special stock that carried multiple votes per share, effectively control the company without ever having a significant ownership stake, thereby uncoupling its interests to an even greater degree from those of other shareholders. Edelman et al., at 995.
The Dallas/Barry study concluded (at 551-552) that, in terms not only of the differential between insiders’ voting power and their proportion of share ownership, but of the degree to which the institution of new types of shares encouraged a company’s subsequent issuances of stock, tenure voting was about halfway between one-share, one-vote arrangements and dual-class stock arrangements.
Although the chronology of shareholdings can be preserved and tracked on blockchain-based systems, other concerns about tenure-voting arrangements might not be so easily resolved.
First, it may reduce, but not eliminate, the effect of short-term trading: “[D]istant, smaller shareholders, even if they hold their stock for longer, will still be free riders in corporate governance and, hence, passive. Trading may decline, but the stock will still have a current price that adjusts to new information–and to the extent directors and managers pay attention to changing stock prices, they will continue to see a stock price to pay attention to.” Mark J. Roe & Federico Cenzi Venezze, Will Loyalty Shares Do Much for Corporate Short-Termism?, 76 Bus. Law. 467, 470 (2021).
Second, there remain serious doubts about the viability of installing tenure voting, after their intial public offerings, in corporations listed on the New York Stock Exchange (NYSE) or Nasdaq, each of whom has a policy that:
“Voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the Exchange Act cannot be disparately reduced or restricted through any corporate action or issuance. Examples of such corporate action or issuance include, but are not limited to, the adoption of time-phased voting plans. . . .”
But see David J. Berger et al., Tenure Voting and the U.S. Public Company, 72 Bus. Law. 295, 319 (2017) (arguing that, rather than disparately reducing the voting rights of particular shareholders, tenure voting “treats all stockholders alike [by] grant[ing] all stockholders equal per-share voting rights and equal opportunity to gain additional voting rights by holding their shares over time”).
Third, by one analysis, the ultimate beneficiaries of tenure voting, beyond insiders, might be index fund managers BlackRock, Vanguard, and State Street, which collectively “already own about one-quarter of the stock in a wide array of public companies in the United States. . . . Traders, shareholder activists, and newly formed blockholders with long-term intentions would all lose voting power.” Roe & Venezze, at 471.
Fourth, many major institutional investors, fund managers, and proxy advisors have already publicly endorsed the “one-share, one-vote” policy, at least in principle.
Tenure voting might well, though addressing some problems, create, or exacerbate, others.