Dear Advisor: Our state mandates “cumulative voting” of corporate stock. I understand that the process involves electing a corporation’s board of directors, but I don’t quite get how it is supposed to work. Can you help me out?
A company has 1,000 shares outstanding and is electing 5 directors. Under cumulative voting there will be 5,000 total votes available to be cast for directors (1,000 shares x 5 director positions). A shareholder’s total votes will be determined by the number of shares he or she holds. For example, a shareholder who has 100 of this company’s 1000 shares outstanding will have 500 votes (100 shares x 5 directors). He can cast all 500 for one director or distribute them as he wants. There will be a total of 5,000 votes cast. Those director candidates having the highest vote totals will be elected.
The result of cumulative voting is that it provides a better opportunity for a single shareholder to have a meaningful vote in elections and, if the shareholder has enough shares and concentrates his vote, be represented on the board.
Example: Corporation A has two shareholders, 1000 shares outstanding and will elect five directors. 1000 shares x 5 directors = 5,000 votes; Shareholder 1 has 800 shares (800 shares x 5 director positions = 4,000 votes). He casts 800 votes for each of the 5 directors. Shareholder 2 has 200 votes (200 shares x 5 director positions = 1,000 votes). She casts 900 votes for the sixth candidate not supported by the majority shareholder and 25 votes each for 5 of the 5 other directors. That way, her director gets elected along with 4 of the 5 voted for by the majority shareholder.
Final count: Dissident director 900 votes--all from a minority shareholder
Directors 1-4 825 votes each--800 from majority shareholder and 25 from the minority shareholder
Director 5 800 votes from majority shareholder, loses the election 5 Directors Elected = 5,000 votes
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