What is Cumulative Voting?

Shareholders of a corporation vote their shares of stock to elect members of the Board of Directors using either the statutory voting method or the cumulative voting method.  The method of voting, either statutory or cumulative, is set forth in the corporation’s Articles of Incorporation or state law.  In Ohio, unless the Articles of Incorporation prohibit cumulative voting, the shareholders are permitted to vote cumulatively when electing directors. 

Under the statutory voting method, each shareholder votes all of his shares for each director position to be filled.  Under the cumulative voting method, each shareholder may accumulate his votes for director and vote all or any part of such accumulated votes for one or more director positions. 

Under the statutory voting method, a minority shareholder can never appoint a director without the approval of the majority shareholder.  For example, if one shareholder owns 40 shares and the other owns 60 shares, and the shareholders are electing two directors, the minority shareholder votes 40 shares for each of the two director positions, and the majority shareholder votes 60 shares for each of the two director positions, and the majority shareholder always wins (60 is more than 40) and appoints both directors. 

A different result can occur however with the cumulative voting method.  Under cumulative voting, the minority shareholder has 80 accumulated votes (40 shares X 2 director positions), while the majority shareholder has 120 accumulated votes.  So if the minority shareholder casts all 80 votes (or any number more than 60) for himself for one of the two director positions, there is no way for the majority shareholder to divvy up his or her votes in such a way that both of the majority shareholder’s director candidates have more than 80 votes.

So if you are a minority shareholder, you want cumulative voting so you can get yourself or a representative on the Board of Directors.  If you are a majority shareholder, you probably want to prohibit cumulative voting so you can maintain control of the Board of Directors.   If you would like assistance drafting incorporating or preparing Articles of Incorporation, give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  The IRS believes it has discovered a pattern of taxpayers failing to file gift tax returns for real estate transfers between non-spouse related parties. As a result, the IRS has launched a compliance initiative to capture data from states and counties regarding real estate transfers taking place between non-spouse family members for little or no consideration during the period 2005 through 2010. While the IRS has faced hurdles getting some states to release the data, a number of states have voluntarily done so. These states include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real estate to non-spouse family members should make sure that the required gift tax returns were filed.  Call if we can help.  Jsenney@pselaw.com or 937-223-1130.

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