Cumulative Voting Explained
By Matt Dickstein
Cumulative Voting. Under CA Corporations Code §708,
CA requires cumulative voting for the election of directors. To invoke
cumulative voting, one or more shareholders must give notice prior to the
meeting of the intention to vote cumulatively. Any candidate for whom shares
are to be voted cumulatively must have been placed in nomination prior to the
Cumulative voting means that each shareholder may give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder’s shares are
entitled. The equation is: [number of open director seats X number of shares =
number of votes that may be cast by the shareholder]. The shareholder may also
distribute the shareholder’s votes on the same principle among as many
candidates as he sees fit.
In any election of directors, the candidates receiving the
highest number of affirmative votes are elected.
Example: 3 directors are up for election, for 2
board seats. Assume the following cap table:
Shareholder A: 100 shares
Shareholder C: 75 shares.
Shareholder D: 50 shares.
325 shares outstanding.
The shareholders each have the following votes to split up
among the candidates:
Shareholder A: 200 votes.
Shareholder C: 150 votes.
Shareholder D: 100 votes.
650 votes total.
Under CA Corporations Code §303, a
majority of the outstanding voting shares may remove any or all directors;
except that unless the entire board is removed, a director cannot be removed if
the votes cast against that director’s removal or not consenting in writing
would be sufficient to elect him by application of cumulative voting.
Example: 2 directors are to be removed. Remember
the equation: [number of open director seats X number of shares = number of
votes that may be cast by the shareholder]. Shareholders A, C and D are in
favor of the removal of both directors, and they will split their 450 votes –
225 for the removal of Director 1, and 225 for the removal of Director 2.
Shareholder B is against the removal of Director 1. Shareholder B can cast his
200 votes against the removal of Director 1, but his votes still would be
Some split of the vote from Shareholders A, C and D would
be required for Shareholder B to obtain the addition votes needed to block the
removal of Director 1. For example, if Shareholder D joins B, then they would
have a combined 300 votes to block the removal of Director 1. This would leave
Shareholders A and C with only 350 votes to split between Directors 1 and 2.
Shareholders B and D would be successful in blocking the removal of Director 1.
If only one director is to be removed, then the calculus
becomes easier. In this case, each shareholder can only vote his number of
shares, and simple percentage ownership rules. For example, Shareholders A and
C can cast 350 votes in favor of the removal of the one director. Shareholders
B and D can only cast 300 votes, and would lose.
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