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Directors’ Voting Rights Can Be Limited

Logo for Quora, where Dana Shultz answered a question about limiting directors' voting rightsThis post about limiting directors’ voting rights is based on my answer to a Quora question. (See Can a business owner draw up bylaws/articles of an organization that limit voting rights of directors?)

The incorporator or shareholders may approve a certificate of incorporation or bylaws that limit directors’ voting rights.

Directors’ Voting Rights on Specific Issues

In my experience, these limitations typically concern voting on specific issues. For example, I represent the investor-shareholder of a newly-formed corporation. She requested that the following provisions be included in the bylaws (emphasis added).

The preceding provisions of this Section notwithstanding, the Corporation shall not take any of the following actions without the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of stock of the Corporation entitled to vote, in addition to any other approvals that may be required pursuant to the Corporation’s Certificate of Incorporation or the Bylaws of the Corporation or applicable law:

a. Changing the nature of the Corporation’s business.
b. Forming any subsidiary, acquiring an equity interest in any other entity, or creating a joint venture.
c. Participating in a merger or acquisition.
d. Borrowing or lending in an amount greater than, or for any purpose other than, normal trade debt.
e. Issuing, redeeming, or purchasing, or changing any of the rights of, or making a public offering of, any of the Corporation’s equity securities.
f. Declaring or paying dividends.
g. Liquidation of the Corporation.
h. Instituting, settling or compromising any lawsuit or legal claim.

International Perspective

I have seen more-detailed restrictions from some of my international clients (foreign entities bringing their businesses to the U.S.), because they are accustomed to such restrictions in their home countries. Here are provisions added by one of those clients (emphasis added).

Shareholder Approval Required. The board of directors shall not take any of the following actions without prior approval by the holders of a majority of the outstanding shares:

  1. Purchase or sale of any securities of, or any ownership interest in, any other legal entity or company.
  2. Transfer of control of the corporation’s business or any portion thereof.
  3. Entering into or terminating a joint venture.
  4. Entering into bankruptcy, reorganization, liquidation or similar proceedings.
  5. Issuing any securities of the corporation.
  6. Redeeming or repurchasing any securities of the corporation.
  7. Creating a stock option plan or granting any stock options.
  8. Acting as guarantor, surety or joint debtor for the benefit of any third party.
  9. Implementing any pension, profit-sharing or bonus plan for employees.
  10. Appointing an auditor or changing the corporation’s valuation methodology.
  11. Entering into, amending or terminating any undertaking or legal relationship outside the ordinary course of business with a financial interest greater than $25,000.
  12. Making any material change to the corporation’s business activities.
  13. Establishing remuneration, or other terms or conditions of service, for members of the board of directors.
  14. Acquiring, selling, leasing, transferring or receiving any interest in real property except as expressly authorized in the corporation’s budget.
  15. Adopting the corporation’s budget or business plan.

In summary, if you form a corporation and want to limit directors’ voting rights, it is pretty easy to do so.

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.