The Shareholder Judgment Rule: Delaware's Permissive Response to Corporate Vote-Buying

By Pavelich, Joe | Journal of Corporation Law, Fall 2005 | Go to article overview

The Shareholder Judgment Rule: Delaware's Permissive Response to Corporate Vote-Buying


Pavelich, Joe, Journal of Corporation Law


I. INTRODUCTION

The concept of "vote-buying" is naturally sinister. The phrase conjures images of machine politicking, in which cash and influence hold sway over conviction and control the outcome of important elections. Such a milieu may not be far from the truth in the arena of civic elections, where vote-buying remains an ongoing concern in several nations' election processes,1 including recent U.S. presidential elections.2 Civic votebuying is not only per se illegal,3 but it is also a charge that evokes a general cynicism about the democratic process itself. The charge of "vote-buying" frequently arises where private companies donate to the campaigns of elected officials,4 and when elected officials send federal money to their jurisdictions to assist in their re-elections.5

Vote-buying in the corporate realm has long since left behind the concept of per se illegality, though judicial opinions have seemingly reserved censure for some unspecified future case. Part II of this Note will explain the history of corporate vote-buying, and the shift in Delaware law that now allows for differentiation between acceptable and unacceptable instances of vote-buying. Part III will focus on some of the theory underlying the shift in the courts' thinking, away from per se illegality of vote-buying, and toward a regime in which courts presume that vote-buying is in fact legal. Part IV will offer the recommendation that Delaware courts return to a regime in which votebuying remains legal but raises a specter of suspicion that requires the courts to employ a measure of legality similar to the business judgment rule.

II. BACKGROUND

A. Traditional Approaches to Corporate Vote-Buying

Historical common law cases often voided corporate vote-buying.6 Though the courts did not always clearly articulate the rationales behind their judgments, decisions generally fit into three categories: (1) the behavior was illegal because it separated the ownership interest from the controlling vote;7 (2) consideration personal to one shareholder violated his fiduciary duty to the other shareholders;8 and (3) the taint of civic vote-buying spread over to the corporate arena and the issues did not require independent analysis.9 An examination of these early cases demonstrates the varied rationales that the courts adopted in reaching similar conclusions.

In Smith v. San Francisco & Northern Pacific Railway Co.,10 the court operated within a statutory framework that made voting eligibility dependent on being a "bona fide stockholder[] having stock in his own name on the stock-books of the corporation." ' ' The California Supreme Court confronted a situation in which two purported stockholders gave a proxy to a third party to vote in an upcoming election.12 An uncontested affidavit, however, noted that while the two were "on the books" of the organization for a total of 8685 shares,13 they were only "dumm[ies] for the real owner," a New York brokerage firm, and did not own the shares for which they voted.14 The court announced that a stockholder in name only, with no interest in the company itself, "should not be allowed to vote at an election."15 In a discussion of voter trusts, also at issue in the case, the court noted that precedent allowed separating the voting rights through the use of proxies,16 but that "[t]he stockholder cannot separate the voting power from his stock by selling his right to vote for a consideration personal to himself alone, any more than he could agree[,] for the same consideration^] to cast the vote himself."17

The Smith court took pains to lay out a continuum of acceptable behavior on the part of stockholders. The votes assigned on behalf of the brokerage firm were rejected because the assignors of the proxies had no stake in the company.18 Likewise, the voting trust was upheld because each member of the trust had a similar stake and was motivated to limit the trustee's discretion through the instrument. …

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