Shareholder Voting Agreements

Shareholders are allowed to enter into voting agreements with each other. Such agreements may help them to combine allocated to them votes to pass the decision. DGCL § 218(c):  “An agreement between 2 or more stockholders … may provide that in exercising any voting rights, the shares held by them shall be voted as provided by the agreement…”

 

Directors cannot enter into similar voting agreement. This is the prerogative of the shareholders. Each director has an obligation to exercise his own business judgment because directors own special fiduciary duties to the corporation. For example, shareholders in a close corporation can agree to elect each other as directors of the corporation. Election of directors requires shareholders voting. So that’s OK. However, shareholders cannot agree to elect each other as executives of the corporation. Why? Because executives appointment requires action as directors and each director has to vote independently.  Accordingly, shareholders in a small corporation can vote to appoint each other on board, but cannot agree to vote to elect each other as executives when acting as directors of the corporation. Directors owe duties to all shareholders, not just the ones with whom they contract.

 

There is only one exception to the above-said, the court held in Clark v. Dodge that it is OK to pre-commit to provide job for each other if there’re just two shareholders in the corporation, because they don’t harm anybody else except themselves, accordingly it would not be against public policy.

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