Directors Cannot Vote By Proxy at Board Meetings
Note: This article refers to Delaware General Corporations Boards of Directors. It does NOT refer to Stockholder rights in a Delaware General Corporation.
In Delaware, a corporate director cannot appoint another to act in his or her stead in exercising the director’s authority at a board meeting. For instance, a director that is unable to attend a board meeting because of an illness cannot name another person to exercise the director’s vote, even when the appointed person would merely cast the absent director’s pre-determined vote and not exercise his or her independent discretion. The Delaware Supreme Court articulated this consistently-held prohibition over a century ago, stating: “Discretionary powers, questions of policy, business administration, all imply personal attendance at the meeting” and that personal presence (by any permitted means) “is obligatory” for a director’s vote at the meeting to be effective.[1] Below, this article examines the reasons for this policy, how the Delaware Courts have applied it, and how Delaware law has adapted to narrowly tailor prohibition’s application to the policy’s stated purpose.
Source of the Prohibition
The prohibition stems from a directors’ fiduciary duty of care owed to the corporation under Delaware law.[2] To satisfy that fiduciary duty of care in supporting or opposing corporate action, directors must inform themselves “prior to making a business decision, of all material information reasonably available to them.”[3] This determination is very fact specific, and the contours of the necessary steps to inform themselves vary with the decision, the topic, the circumstances, and the director’s own knowledge and experience. The analysis is process-based, rather than looking to outcomes – the Court of Chancery will not second-guess unsuccessful or even ill-advised decisions with the benefit of hindsight, so long as the director took the appropriate steps to inform him or herself prior to voting on corporate action.
Attendance is a De Facto Requirement of Voting for Satisfying the Duty of Care
In making attendance at a meeting an obligatory part of the duty of care, the Delaware Supreme Court effectively held that casting a vote in absentia is a rare de facto violation of the duty of care. But why, given that such a de facto violation runs contrary to the courts’ focus on process on a case-by-case basis? Since 1915, Delaware courts have consistently and repeatedly stated that director meetings are not merely intended to facilitate a vote; they are integral to an informed discussion by providing debate and discussion on a matter to be voted upon.[4] In the collaborative environment of the meeting, each director can present his or her views and gain the benefit of the opinions of other directors, officers at the meeting, and any expert presenters or service providers addressing a given issue.
Expanded Permitted Means of Board Attendance Mitigates the Presence Requirement
In the past, attendance meant that a director was physically in a room with other directors at a specific location. Embracing technological advances, Delaware law now permits directors to be deemed present at a meeting through technology, even if not physically together. So long as each director can hear and be heard by the other directors, Delaware law permits attendance by telephone, videoconference, or similar means, subject to the terms of a corporation’s governing documents that limit such attendance. [5] The development of new communication methods and Delaware’s embrace of those advances mitigate any perceived inconveniences created by the proxy prohibition, as valid director “attendance” can occur from any location in the world.
Director Proxies Would Undermine Stockholder Voting
Allowing director proxies would also undermine stockholder voting for directors, which has been described as “the lynchpin on which the legitimacy of corporate democracy rests.” The stockholders voted on specific persons to serve as directors on the corporation’s board based on information relating to their experience, qualifications, judgment, and reputation. Delaware policy and case law protect the stockholder vote (often referred to as the “stockholder franchise”), and threats to it are often met with the Court of Chancery’s rare exercise of its equitable powers. Affronts to the stockholder franchise are twice tested – once for legal compliance and once for principles of justice, fairness, and subjective motive. The stockholders voted for specific individuals as the corporation’s agents, subject to the highest duty of care and loyalty, and the proxy prohibition is another example of Delaware’s protection of the stockholder franchise.
But Directors Generally Delegate Significant Authority to Officers – Apples and Oranges
Certainly, a corporation’s board of directors regularly delegates authority to officers and others. This delegation, however, is of day-to-day management authority and operating functions that Delaware law expressly contemplates will be performed by officers and employees.[6] Delaware law contemplates the delegation by imposing the same fiduciary duty upon officers as it does upon directors, which is not the case for a person simply appointed by a director to act as his or her proxy. An appointee could be subject to a contractual or even separate fiduciary obligation to the director, but the director has no power to unilaterally convert such a person to a corporate fiduciary.
Delaware Law Provides a Means for Acting Without a Meeting
Delaware law permits corporate boards to act without a meeting, referred to as action by written consent. Under action by written consent, however, an action must be unanimous and each director must waive the requirement of a meeting. However, if a meeting is held, less than unanimity is required for board action – usually a majority or two-thirds supermajority vote, depending on the issue under consideration. The unanimity requirement in this context reflects the importance of the meeting and the concomitant deliberation as a matter of policy under Delaware law. Were a director able to appoint a proxy, directors that could not attend a meeting could circumvent this policy, avoiding the unanimity requirement without the benefit of a directors’ attendance. Thus, Delaware law endeavors to provide sufficient means to act without a meeting, balancing the interests and policies described in this article.
Delaware’s Quorum Requirements Accounts for Director Absences
Delaware law’s quorum requirements provide ample flexibility for situations where one or more directors are absent from a meeting.[7] A “quorum” of the board is the required number of directors required to take valid corporate action at a meeting. Under Delaware law, a quorum is met where a majority of the board is present and voting unless the corporation’s governing documents set a lower threshold (no less than one-third of the board) or require a higher quorum (up to full attendance) for certain decisions or as a general matter. Critically, Delaware law only requires a majority of a quorum of a corporation’s board, not of the full board, for valid action, so the quorum requirement is a key accommodation to the exigencies and difficulties of corporate administration and governance.
Therefore, a company with seven directors serving on its board would require four directors present and voting to obtain a quorum under ordinary circumstances; assuming four directors are present and voting, a normal vote, one that can be made by a majority of directors constituting a quorum, would require three directors’ approval.[8] Thus, Delaware law accommodates for director absences within the circumscriptions of the original policy prohibiting director proxies stated above.
Conclusion
Apart from understanding the policy, its purposes, and how those purposes inform its application, the prohibition on director proxies is a principle of black letter law that must be considered whenever a quorum or director attendance becomes an issue, in the regular course of governance or amidst exigencies and chaos. A director proxy may seem a superficially tempting option, particularly in the case where the sole delegated task is the actual act of casting a predetermined vote by an absent director, without more. While there are other means of obtaining board consent, even in the absence of a meeting, director proxies are a very rare scenario where Delaware has drawn a black line requirement for satisfying the duty of care, rather than taking into account case- and circumstance-specific f
[1] Lippman v. Kehoe Stenograph Co., 95 A. 895, 899 (Del. Ch. 1915).
[2] See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) (“In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders” (citing Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939)).
[3] Id.
[4] See Lippman, 95 A. 895.
[5] See Delaware General Corporation Law §141(i) (hereinafter “DGCL”).
[6] See DGCL §142 (“Every corporation organized under this chapter shall have such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the board of directors[.]”).
[7] Id. at §141(b) (“A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number.”).
[8] Thus, a quorum of a board can effect corporate action with less than a majority of the full board participating. As a result, the Court is very protective of strict compliance with the notice requirements directors are entitled to receive of meetings and the substance of such meetings. Delaware law opposes directors colluding to exclude other directors from deliberations, voting, or even information, such as when cliques of directors sandbag others by withholding information or seeking to act through undisclosed, break-away meetings to strategically cut out other directors. See, e.g., OptimisCorp v. Waite, 137 A.3d 970 (Del. Apr. 25, 2016) (“Be it a director with a controlling interest or a director with only a handful of shares, we are uncomfortable embracing the idea that cliques of the board may confer and sandbag a fellow director. … [W]e are reluctant to accept the notion that it vindicates the board’s right to govern the corporation to encourage board factions to develop Pearl Harbor-like plans to address their concerns.”).
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