1405008 Informal Interpretation

Michael Verne

We think the distinction here is that the holders of common and preferred stock do vote for the election of the fifth director, even though their choice of who they can vote for (and who they are required to elect) is limited to the CEO. We would say that each holds 50% (100% x 2/5 + 50% x 1/5)

KW concurs.


From: (Redacted)
Sent Tuesday, May 27, 2014 9:27 PM
To: Walsh, Kathryn E.; Verne, B. Michael

Subject: 801.12 Question - Charter's Incorporation of the Terms of a Voting Agreement (and requirement to elect the CEO)

Kate and Mike,

Hope you both had a good Memorial Day weekend. l have an 801.12 question which deals with a scenario in which the charter incorporates a voting agreement's terms, and would love to get your read on it.

Assume a scenario in which an issuer has only two classes of stock-"Preferred" and "Common"-each of which have 100 shares outstanding and, per the charter, each elects 2 directors out of a 5 director Board. The charter then goes on to say that all remaining directors will be elected pursuant to a specific provision of the Stockholders' Agreement.

That provision of the Stockholders' Agreement requires that, for this fifth seat, the Preferred and the Common holders vote to elect the Company's Chief Executive Officer as a director.

With that in mind, can you let me know your thoughts on the following:

• Presumably the charter's incorporation by reference to a voting agreement (the Stockholders' Agreement) is an exception to the usual rule that voting agreements don't factor into the 801.12 calculations (here the agreement is essential to reading terms back into the charter);

• That said, would a shareholder ("Preferred Holder'') holding all of the Preferred shares be deemed to hold 50% of the outstanding voting securities (since its shares are entitled to elect 2 out of 5 directors as well as representing half of the shares that serve to "elect" the CEO as director);

• Alternatively, since there is no discretion in the voting for the fifth director (i.e., it must be the CEO), would this result mean that the Preferred Holder would only be deemed to be holding shares that represent 2/5's (so, 40%) of the overall outstanding?

By analogy, Informal Interpretation 0004015 would suggest that the 50% result is the right one. http://www.ftc.gov/enforcement/premerger-notification-program/informal-interpretations/0004015 However, unlike that interpretation's scenario of a shared power to elect a director here we have a vote that stands as a simple ratification of the election of a specific individual (by title)-the CEO.

If the key is that the shares do nonetheless "vote" for the CEO, I assume that if the charter had been drafted to simply establish that the CEO would be the fifth director that would have given the Preferred Holder a 40% stake instead (derived from its ability to elect 2 out of the 5 directors).

About Informal Interpretations

Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

Learn more about Informal Interpretations.