Cumulative Voting Protects Minority Shareholders

How cumulative voting works

Usually, the articles of incorporation provide that shareholders vote for an entire slate in a "straight" vote. Thus, the shareholders with the most shares (called the majority shareholders) will always be able to outvote minority shareholders (those shareholders with minimal votes) relating to either the election of directors or other ordinary corporate matters. Cumulative voting is a technique whereby minority shareholders concentrate all of their voting strength on one or more individual directors with the hope that they are elected. It is an excellent way of helping to preserve minority shareholder representation on the board of directors. The formula is the number of shares held times the number of individual directors to be elected.

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EXAMPLE 1 Barton Cain owns 105 shares of Soloway Sugar Refining Corp. Soloway's articles of incorporation stipulate cumulative voting for the election of directors. Barton may cast 420 votes (number of shares held [105] times directors to be elected [4]) for one or more directors of his choice.

EXAMPLE 2 Mary Benis owns 105 shares and Todd Tryon owns the other 300 shares of the Rochester Travel Agency Ltd. Rochester's articles of incorporation stipulate cumulative voting for the election of directors. Mary wants to elect A, B, and C as directors while Todd wants X, Y, and Z. In straight voting, Todd would be able to elect X, Y, and Z, thereby, denying Mary representation on the board. However, under cumulative voting, Mary would have 315 votes (105 shares % 3 directors). If Mary concentrates all of her votes on either A, B, or C, she will be able to elect at least one director. Todd has 900 votes (300 shares % 3 directors). If Todd spreads all of his votes among X, Y, and Z, each will receive 300 votes (900/3). Since Mary's 315 votes will always exceed the votes needed to elect at least one director, she is always assured at least some representation on the board.

Thus, cumulative voting is an excellent device for use in a closely held corporation where minority shareholders always fear that they will be shut out from representation on the board. Note that cumulative voting only applies to the election of directors. All other corporate matters are usually decided by straight voting.

CORPORATIONS STEP-BY-STEP by David Minars, M.B.A., J.D., CPA. Copyright 1996 by Barron's Educational Series, Inc. Published by arrangement with Barron's Educational Series, Inc.

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