Limitation on Shareholder Action by Written Consent Clause
(Articles of Incorporation) (PA Corporation)

Summary

This Limitation on Shareholder Action by Written Consent Clause (Articles of Incorporation) (PA Corporation) may be included in a Pennsylvania corporation’s articles of incorporation to prohibit shareholder action by written consent. This clause contains practical guidance and drafting notes. State corporation statutes empower shareholders to vote, at annual and special shareholder meetings, on matters put before them by the Board of Directors or fellow shareholders. The requirements for each type of meeting are set forth in the articles of incorporation (or the bylaws, or both). Most states have enacted statutes authorizing shareholders to alternatively submit written consents in lieu of meeting. Written consents are counted as “yes” votes in favor of the proposed action and abstentions are interpreted as constructive disapprovals (i.e., “no” votes). In return for this permissiveness, the corporate laws of most states generally require unanimous written consent to the proposed action. However, some states allow shareholder action by written consent at the same voting standard that would otherwise apply—usually an absolute majority (generally not a simple majority)—under the articles of incorporation (or the bylaws) as if a shareholder meeting were held. Other states provide mixed thresholds for written consents—unanimous for certain purposes and an absolute majority (or another standard) for others. Despite what state corporation law may allow, some corporations specifically disallow or limit shareholder written consents in their charters, primarily because they offer a back-door mechanism for insurgents to wrest corporate control from incumbents. By attaining majority approval (or whatever other threshold exists under state corporate law to gain “control”) by written consent, corporate raiders may be able to force changes in membership of the Board of Directors (or achieve other ends) without necessity of waiting for the annual meeting or calling a special shareholder meeting. Section 1766 of the Pennsylvania Associations Code authorizes the use of shareholder written consents in lieu of meeting. 15 Pa. Cons. Stat. § 1766. Accordingly, if shareholder written consents are disfavored by the founders of a business entity who plan to incorporate in Pennsylvania, or by the board of directors of an existing Pennsylvania corporation, then the articles of incorporation must prohibit their usage. For further information on Pennsylvania corporations, see Formation and Qualification (PA Corporation).