In a democratic society, the majority vote wins. Democratic societies sometimes devise alternate structures to provide for the protection of the minority. In the United States, a bicameral legislature and a separation of powers, especially the power of the judiciary, are generally thought to be sufficient to protect the rights and interests of the minority.
In a corporation, the majority also rules. However, corporations normally set up no additional structures to protect the minority. For example, if a corporation has two owners and one has 51% of the shares outstanding and the other has the remaining 49% of shares outstanding, the owner holding 51% of outstanding shares can usually defeat the other owner on every vote. The majority rule allows the majority shareholder to control all positions on a Board of Directors each director is voted on individually, and because the Directors elect the officers, the majority shareholder has total control of the corporation. The minority shareholder is left without representation and with no position other than that of a passive corporate investor. Because a corporation does not provide the structures that make protection of minority interests possible, Illinois law has attempted to remedy this situation and provide a means of protection for minority shareholders.
STACKING THE VOTE
The Illinois Business Corporation Act of 1983 provides for a process of voting known as cumulative voting. Cumulative voting simply means that the number of votes available to a shareholder in any given election is equal to the number of shares outstanding held by the shareholder times the number of positions up for vote. Then, all positions are voted on at the same time with the highest vote getters being elected. The key is that a shareholder’s votes may be voted in any possible combination and, most importantly, may all be cast for the same director. For example, if a shareholder holds thirty percent of a corporation in thirty shares of common stock and is voting on three Board of Directors positions, that shareholder holds ninety votes which can all be used to vote on just one director position or spread in any manner between the other director’s up for election. A provision for cumulative voting would read as follows:
Cumulative Voting: “Each shareholder voting at an election of directors shall have the right to as many votes as shall equal the number of directors to be elected, multiplied by the number of shares owned by such shareholder. Each such shareholder may either give all of those votes, so computed, to one candidate, or may distribute those votes on the same principle among any number of candidates.”
CUMULATIVE VOTING IN ACTION
The end result of cumulative voting is that a minority shareholder is able to obtain some representation on the Board of Directors of the corporation and thus, at least can have at least some say in the management of the corporation. The following is an example of cumulative and non-cumulative voting in action.
Example: Bill and Jim are shareholders in Acme, Inc. Bill holds seventy shares of stock and Jim holds thirty shares of stock. At the annual meeting of shareholders, a vote for the three spots on the Board of Directors is being held. Bill supports John, Scott and Mike for the board of directors while Jim Supports Tom, Tim and Ted.
Under a cumulative voting system, Bill votes his seventy shares for his candidates to the Board and easily defeats Jim’s nominees. The vote goes as follows:
In a non-cumulative voting system, because he controls a majority of the votes on any given election, Bill controls all positions on the board of directors.
Under the cumulative voting system, things are not much better, but at least Jim has some representation. In a cumulative vote, Bill would hold 210 votes and Jim would hold 90 votes which can be voted in any combination. The cumulative vote goes as follows:
The result is that Bill is able to place John and Scott on the Board of Directors, but also that Jim is able to place Tom on the Board of Directors. Jim now has some representation in the broad policy making of the corporation.
The key to the entire process is determining whether or not a corporation will extend the rights of cumulative voting to its shareholders. In Illinois, the Business Corporation Act of 1983 makes cumulative voting the norm and it is assumed that unless the Articles of Incorporation or by-laws specifically preclude cumulative voting. The decision as to whether or not a corporation should allow cumulative voting is best made in the pre-incorporation phase of the incorporation process. During this stage of the process, the parties are still able to negotiate the rights and responsibilities between them. Basically, the decision is one of control and how much is needed by minority shareholders and how much is demanded by majority shareholders. Although the decision of whether or not a corporation uses cumulative voting may be changed by amending the corporate documents, it is always better to determine the manner of voting prior to it becoming a major issue.
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