Cumulative Voting

Nadezhda Iliescu holds a minority stake in a corporation and is comparing its voting method to that of another holding. Which statement correctly distinguishes cumulative from statutory voting?

1. A.Cumulative voting lets a shareholder concentrate a pool of votes equal to shares times directorships on one or a few candidates, aiding minority holders.Correct. Concentration of the same total vote pool is what distinguishes cumulative voting.
2. B.Cumulative voting gives each shareholder more total votes than statutory voting does.The total pool is identical; only the freedom to allocate it differs.
3. C.Statutory voting permits a shareholder to cast all available votes for a single candidate.That is the cumulative method; statutory voting caps votes per candidate at shares owned.
4. D.Cumulative voting applies only to preferred shareholders, while common shareholders vote statutorily.The voting method is set by the corporate charter and is not tied to share class in this way.

Why: Under statutory voting a shareholder may cast up to one vote per share for each director position, but votes cannot be moved from one contest to another, so a majority holder can elect the entire board. Under cumulative voting the shareholder receives a total pool of votes equal to shares times the number of directorships and may concentrate that pool on one or a few candidates. Cumulative voting therefore improves a minority shareholder's chance of electing at least one director.

Cumulative voting, compared with statutory voting, tends to:

1. A.Favor minority shareholdersCorrect - vote concentration helps minorities.
2. B.Eliminate voting entirelyCumulative voting changes how a shareholder may allocate votes, not whether voting exists. Each share still carries voting rights; the holder may simply concentrate them on fewer candidates.
3. C.Favor only majority holdersThis describes statutory voting, where votes must be spread evenly across the directorships and the largest holder can sweep every seat. Cumulative voting exists precisely to blunt that advantage and help minority holders.
4. D.Guarantee board control to managementNo voting method guarantees an outcome to management. Cumulative voting moves in the opposite direction, making it easier for a minority bloc to concentrate votes and capture a board seat.

Why: Cumulative voting lets shareholders pool votes on one or few candidates, favoring minority holders.

Barnabus Achterberg owns 500 shares of a corporation that elects four directors this year using cumulative voting. What is the maximum number of votes he may cast for a single director candidate?

1. A.500 votesThis is the statutory-voting maximum for a single candidate.
2. B.1,000 votesThis multiplies shares by two rather than by the four directorships being filled.
3. C.2,000 votesCorrect. 500 shares times 4 directorships equals a 2,000-vote pool, all of which may go to one candidate.
4. D.125 votesThis divides shares by the number of seats instead of multiplying.

Why: Under cumulative voting the shareholder's total vote pool equals shares owned multiplied by the number of directorships being filled: 500 times 4 equals 2,000 votes. The shareholder may distribute that pool in any fashion, including casting all 2,000 for one candidate. Under statutory voting the same holder could cast no more than 500 votes for any one candidate.

Farrow Instruments has 1,200,000 shares outstanding and is electing 5 directors under CUMULATIVE voting. What is the smallest number of shares a dissident group must control to guarantee electing at least one director?

1. A.1,000,000 sharesThis is a supermajority and far more than cumulative voting requires for a single seat.
2. B.200,001 sharesCorrect. 1,200,000 / (5 + 1) = 200,000, and one additional share puts the group past the threshold that guarantees a seat.
3. C.240,000 sharesThis divides by 5 instead of 6. Using the number of seats rather than seats plus one is the classic setup error.
4. D.600,001 sharesThis is a simple majority of the shares. Cumulative voting exists precisely so a minority far below 50 percent can win representation.

Why: Under cumulative voting a holder may pile all of his votes onto one candidate. To be mathematically certain of one seat when 5 seats are open, a group needs more than one sixth of the shares: 1,200,000 divided by (5 + 1) equals 200,000, and one more share guarantees it. The answer is 200,001. Review cumulative voting in the equity securities topic.