Responding To Stockholder Proposals, Director Elections And Say-On-Pay Votes

• Published date: 08 November 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Venable LLP
• Author: Mr James Hanks, Jr., Michael Schiffer and Michael Sheehan

As boards of directors of public companies prepare for their 2023 annual meetings and, relatedly, consider the voting results from 2022 annual meetings, we are being asked for advice concerning (a) the duties of directors of Maryland corporations and (b) the policies and current practices of the proxy advisory services relating to stockholder proposals, director elections and Say-On-Pay votes.

Director Duties

We are often asked to advise boards of directors of Maryland corporations on their duties in connection with (a) precatory proposals approved by shareholders, (b) directors who fail to receive majority support at annual meetings and (c) Say-On-Pay votes. For many years, we have consistently responded that Maryland law does not require a board to follow a request from the stockholders on an agenda item (including a shareholder proposal, director nominee failing to receive majority support or a failed Say-On-Pay vote) even if approved by a majority or significant majority of the votes cast or the votes entitled to be cast.

Section 2-401(a) of the Maryland General Corporation Law (the "MGCL") provides that "[t]he business and affairs of a [Maryland] corporation shall be managed under the direction of a board of directors." Section 2-401(b) confers on the board "[a]ll powers of the corporation . . . except as conferred on or reserved to the stockholders by law...." In discharging his or her duties as a director of a Maryland corporation, Section 2-405.1(c) of the MGCL requires each director to act "[i]n good faith," "[i]n a manner the director reasonably believes to be in the best interests of the corporation," and "[w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances." Further, Section 2-405.1(g) unambiguously provides that: "An act of a director of a corporation is presumed to satisfy the standards of subsection (c) . . . ." Pursuant to Section 8-601.1 of the Maryland REIT Law, these standards also apply to acts of trustees of Maryland real estate investment trusts.

The United States District Court for the District of Maryland has held that there is no duty for directors of a Maryland corporation to follow the wishes of holders of a majority of the shares. See Martin Marietta Corp. v. Bendix Corp., 549 F. Supp. 623, 633 n.5 (D. Md. 1982), quoted in Mountain Manor Realty, Inc. v. Buccheri, 55 Md. App. 185, 197-98, 461 A.2d 45, 52-53 (1983). The court in Martin Marietta rejected the contention that an earlier Maryland case, Cummings v. United Artists Theatre Circuit, Inc., 237 Md. 1, 204 A.2d 795 (1964)...