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Corporate Governance: Thoughts About Proper and Improper Shareholder Votes

In general, corporations are run as mini-democracies, at least in terms of important corporate decisions. The shareholders, for example, are the owners and they meet at least once a year to elect the directors of the corporation. Once elected, the directors then meet to consider and vote on various important corporate decisions like who to hire as the Company’s Chief Executive Officer (“CEO”). The CEO (and other members of senior management) run the company’s day-to-day operations. As we have noted previously, with small, closely-held corporations, there is often a large overlap in these categories — shareholders are often elected as directors and directors are often among the senior management.

If disputes arise among the owners and directors of a corporation, one of the more contentious issues can involve determining what is a proper vote. The validity of any vote that is cast is actually quite complex involving several related but distinct components. This article will provide some thoughts with respect to shareholder voting.

If there is a dispute about shareholder votes and voting, here are some of the necessary steps toward resolution.

First, a reading and analysis of the corporation’s bylaws and articles of incorporation must be undertaken. In general, there is one vote per share and majority rules. But corporate bylaws and articles can be written to modify these general rules. Over the years, the Board might have modified voting rules mostly through the mechanism of issuing different classes of stock that might have different voting weights — one vote per share for common stock, but 10 votes per share for preferred stock. It is even possible for some shares to have no voting rights. Another variation on the general one-vote-one-share rule is something called cumulative voting, which was a fad in corporate governance a couple of decades ago.

Second, in addition to the number of votes, the bylaws, articles, and board minutes will likely establish the rules with respect to who can vote shareholder shares, when the votes can be cast, and how. As can be seen, corporate voting can be complex. For example, the “who” question covers topics like forged shares, shareholders who are impersonated, shares that are voted by proxy, and shares that might be subject to competing claims of ownership claims. What are the rules with respect to proxy voting? Who gets to vote shares where spouses are engaged in divorce warfare? The “when” and the “how” can be important, too. Does the shareholder or proxy-holder have to attend the meeting in person? Can voting be done by mail? Can the shareholder vote the day after the meeting?

Third, there is a complicated set of legal issues with respect to who determines whether particular votes are proper or improper and how to handle any alleged improper votes in the balloting. In general, if the vote result is lopsided, the suspicious votes are probably unimportant and everyone can get on to other business. Take an example of 100 shares and a vote on Candidate A for membership on the board. If the vote is 80 “yes” to 20 “no,” no one will probably care too much if there is a serious question about 20 of the “yes” votes. Even if those are disregarded, Candidate A still wins 60 to 20.

But if the vote is close, these issues might become important and hotly debated. If the original vote is 55 “yes” and 45 “no,” then there may be a fight if there are serious questions about 20 of the “yes” votes. Note that a “serious question” does not necessarily imply some bad action or bad motives. “Serious questions” about a vote might be benign, like these:

  • Unintelligible votes – bad handwriting, mis-spellings or other indecipherable votes
  • Votes for candidates or options that were not available or allowed
  • Too many votes — two boxes are checked when only one box was allowed

Sometimes the solution is common sense: Talk to the voter and get the vote clarified. Sometimes the fight ends up on court.

Contact San Diego Corporate Law

For more information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard has been named a “Rising Star” four years running by and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard by email or by calling(858) 483-9200. Like us on Facebook.

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