Cumulative and Straight Voting: Know the Difference

When deciding how to finance your corporation, there are many considerations to take into account. For example, you may quickly realize that you wish to finance the corporation by issuing shares. But did you consider what rights would go along with those shares? Did you decide what types of shares they would be? These important questions are often overlooked by the incorporators, and the ramifications can be significant.

One such right incorporators may overlook is what type of voting rights to grant shareholders: cumulative or straight. Cumulative voting refers to the fact that a shareholder has votes that are equal to the number of shares multiplied by the number of positions the shareholders are voting for. Meanwhile, straight voting refers to the fact that a shareholder may only cast one vote per share that the shareholder has.

To demonstrate this distinction, take for example the following hypothetical: There are 1,000 outstanding shares. You have 300 shares, and there are five open seats. In a straight voting system, you can only vote 300 times per open seat, and therefore you cannot ensure that a single director you want on the board will be guaranteed a seat. In a cumulative voting system, you have 1,500 shares to vote whichever way you wish. You can divvy these up among the five open seats, and can give three candidates 500 votes each, or just one mere vote short of being given a position. At this point, you are almost guaranteed you can vote in three candidates of your choosing.

Cumulative voting allows minority shareholders to have a say in the board of director meetings. This is because a minority shareholder, as demonstrated above, may be able to put all of their votes on one person and the majority shareholder cannot divide up their votes in a way to elect all of their directors.

Knowing the difference between cumulative and straight voting can have huge implications in your corporation. It can give minority shareholders rights they otherwise would not have. Therefore, deciding what voting rights to give shareholders is important in a corporation. Consulting with a business lawyer can give you the insight you need in making such important decisions. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.