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Supermajority Voting Provision

A provision requiring certain corporate actions to receive more than majority approval from its shareholders to pass

What is a Supermajority Voting Provision?

A supermajority voting provision, an amendment to a company’s corporate charter, is a provision that states that certain corporate actions require more than majority (typically 67%-90%) approval from its shareholders to pass. In other words, a supermajority voting provision requires greater than a majority shareholder approval for certain corporate actions to be approved.

 

Supermajority

 

How the Supermajority Voting Provision Works

A supermajority voting provision is used for corporate actions that may significantly impact the future of the company. Corporate actions that may require a supermajority vote include:

  • The hiring of and firing of senior management members
  • A merger or acquisition
  • The investment bank(s) to go public with an initial public offering (IPO)
  • The investment bank(s) to go private with
  • A spin-off of a business segment

The rationale behind a supermajority is to ensure that the large majority of shareholders are on board with the corporate action in question. A supermajority provision, as opposed to a simple majority, reduces the possibility of many shareholders being disappointed with the outcome of a vote.

 

Supermajority vs. Simple Majority

A supermajority is generally used for major corporate actions while a simple majority is used for actions that do not result in a significant impact on the company.

  • A supermajority typically requires anywhere from 67%-90% of shareholder approval before the action is approved.
  • A simple majority requires only 50.1% of shareholder approval before the action is approved.

A supermajority provision is employed to ensure that the vast majority of shareholders approve of the corporate action. In a supermajority vote, the possibility of many shareholders being disappointed with the outcome of a vote is reduced.

For example, consider an outcome where 51% of shareholders approve a proposed merger. If a simple majority was used, the merger would pass even though 49% of shareholders did not approve of the transaction. The outcome of such a vote, which would result in a major future business impact, would be too obscure and cause management to question whether the merger was in the best interest of all shareholders. Instead, if a company required a 67% supermajority, it would give more confidence to management that they were making the correct corporate decision.

 

Implications of a Supermajority Provision

Although a supermajority voting provision helps ensure that the large majority of shareholders are on board with the corporate action, it may cause gridlock among shareholders and adversely affect the corporate efficiency of the company – it makes it more difficult for corporate actions to pass. A supermajority voting provision may allow for a minority to block the preferences of the majority.

Consider the following example:

Company A is voting on whether to spin off an unprofitable business segment. The management believes that analysts do not realize the potential value of their business due to uncertainty in one of their unprofitable business segments. The company’s charter includes a supermajority voting provision, which requires 90% of shareholder approval before the corporate action can be passed.

In such an example, if a minority shareholder who holds 15% voting rights votes against the spin-off proposition, the preferences of the majority of shareholders would be blocked. The majority shareholders of Company A would be harmed at the expense of the minority shareholder.

Although a supermajority is used to ensure the large majority of shareholders are in favor of a corporate action, it may also act as a double-edged sword and harm the majority shareholders if the supermajority requirement is too high.

 

Example of a Supermajority Vote

US-based automotive and electric company Tesla requires a supermajority vote to approve major corporate actions such as mergers, acquisitions, and changes to the board’s compensation. Tesla’s supermajority voting provision requires at least two-thirds shareholders’ approval for corporate measures to pass.

Although criticized by many shareholders and analysts, Tesla defended the company’s limited voting provision and stated that they “enable the company to meet the long-term interests of its stockholders without being disrupted by these short-term variations and the opportunistic scenarios they often attract.”

With that said, Tesla announced in its 2019 shareholder meeting that is it proposing to eliminate applicable supermajority voting requirements.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Corporate Strategy
  • Pre-Offer Defense Mechanism
  • Shark Repellent
  • Voting Trust

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