Cumulative voting for corporate directors is a process by which each shareholder’s voting power is multiplied by the number of directors to be elected. The objective: By allocating all of their votes to one or a small number of directors, minority shareholders can ensure that their interests are represented on the board. (I.e., a majority shareholder will not automatically control all board seats.)
California Corporations Code Section 708 provides, subject to certain exceptions, that shareholders are entitled to cumulate their votes. However, that right is not granted automatically. At the shareholder meeting, at least one shareholder must give notice of the intention to cumulate votes before voting for directors begins. Once notice is given, all shareholders may cumulate their votes, but only for candidates whose names were placed in nomination before voting began.
Here is a formula that tells how many board positions can be controlled via cumulative voting.
D = (X – 1) x (N + 1) / S
D = the number of directors that can be elected (any fractional portion is ignored, rounding down to the next integer).
X = the number of shares controlled.
N = the total number of directors being elected.
S = the total number of shares voting.
Example: Assume that a shareholder owns 300 of the 1,000 shares that will be voting for 3 directors. D = 299 x 4 / 1,000 = 1.196, i.e., the shareholder can control 1 of the 3 board seats.
Implications for minority shareholders: You should know about cumulative voting.
Implications for majority shareholders: You may not be able to control all seats on the corporation’s board of directors.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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