Cumulative Voting: Board Representation for Minority Shareholders

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.

Example: How Cumulative Voting Helps

The following is an example of how cumulative voting can help a minority shareholder gain board representation:

• Assume that a corporation has issued 1,000 shares, 700 to a majority shareholder and 300 to a minority shareholder.
• Assume that the shareholders will elect three directors.
• Without cumulative voting, the majority shareholder controls all three board seats – for each seat, the majority shareholder’s 700 votes are greater than the minority shareholder’s 300 votes.
• With cumulative voting, however, the minority shareholder can apply 3 x 300 = 900 votes to one candidate for one board seat.
• The majority shareholder has 3 x 700 = 2,100 votes. These are enough for the majority shareholder prevail with respect to two of the board seats, but the minority shareholder will prevail with respect to the third seat.

Cumulative Voting Formula

Here is a formula that tells how many board positions can be controlled via cumulative voting.

D = (X – 1) x (N + 1) / S

where

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 (as above) 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.

Photo credit: Kristen Price via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.