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Under most statutes, the affirmative vote of a majority of the shares represented at a meeting is

required for shareholder action on ordinary matters. Under some statutes, however, only the

affirmative vote of a majority of those voting is required. If a statute requires the affirmative

vote of a majority of those present, an abstention effectively counts as a negative vote.

Virtually all the statutes permit the certificate of incorporation to set a higher vote than would

Otherwise be required.

STRAIGHT VOTING AND CUMULATNE VOTING

In the normal regime for voting on directors, which is sometimes called a straight voting

regime, a shareholder can cast, for each candidate for election to the board, a number of votes

equal to the number of shares.

In contrast, cumulative voting for directors is intended to allow minority shareholders to elect a

number of directors which is in rough proportion to their voting strength. Each shareholder gets

a block of votes equal to the number of shares owned multiplied by the number of directors to

be elected. The shareholder may then cast

entire block for one candidate or may distribute

the votes among any number of candidates in whatever proportion desired. The formula to

determine the number of shares necessary to elect a majority of directors is:

Π(N*S YD+l)
ÿhere
Œ
number of shares needed to elect a given number of directors

S
total number of shares at the meeting

N
number of directors needed

D
total number of directors to be elected

The percentage of stock that minority shareholders must hold to elect at least one director

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Cumulative voting could be a undercut if a director who is elected by a minority under cumulative

voting could then be removed by a majority. Accordingly, some statues provide

that under cumulative voting, a director cannot be removed if the number of shares voting

against the removal would be sufficient to elect. Cal. Corp. Code§ 303(a)(l)

PROΠRULES

(Securities Exchange Act Rules 14a-1-14a-6, 14c-3, Schedule 14A, Schedule 14c)

Proxy voting is the dominant mode of shareholder decision making m publicly held

corporations. The Securities Exchange Act rules provide the proxy rules. The section 14(a) of

the SEC has no effect on private conduct; its only effect was to authorize the SEC to

promulgate rules that will govern private conduct. The purpose of the proxy rules is to require

full disclosure in connection with transactions that shareholders are being asked to approve,

such as mergers, certificate amendments, or election of directors.

The proxy rules also require certain forms of annual disclosure (Rule 14a-3). Proxy rules

regulate the mechanics of proxy voting itself. This is done through Rule 14a-4, which governs

the form of proxy.

Special voting arrangements at the share holder level

a) VOTING AGREEMENTS /

Ringling and Bailey entered into a voting agreement concerning the elections of directors with

a clause stating that in case of disagreement Loos would be the arbitrator and his decisions

would bind the two parties. Before the 1946 annual meeting, the two shareholders went into

discussions as to which they will elect. They did not get to an agreement and because Haley

was sick, her husband took her place. Haley indicated that he wanted an adjournment of sixty

days but because of something that was done by Ringling, he and Mr. North voted against the

motion. Ringling objected to the voting which was not in accordance with the decision of Mr.
Loos. The election took place and the candidates proposed by Loos and others were elected
The Haley- north group objected to the vote insofar as it elected Mr. Dunn. Ringling then

brought suit. The lower court rendered a decision stating that the voting agreement was

declared valid as not in violation of any public policy and with lawful objects and purposes.

The issue was if pooling agreements are valid. The court reversed on one part of the decision.

The court first analyzed the agreement with regards to the powers given to the arbitrator. It

concluded that the arbitrator was not empowered as a trustee, thus his decision would not be

enforceable if the parties did not agree with his decision. But if one of the parties decides to go

with the decision, it binds the two parties.

The court also stated that the agreement did not empower one of the parties to cast the votes of

the other one, they each vote on their behalf. It rejected the argument of the defendants that

section 18 of Del Corp Law applied as it would prohibit any agreements between shareholders

to confer the voting rights to other shareholders. The court then made a distinction between

pooling agreements and voting agreements. The court finally held that the failure of Haley to

exercise her voting rights in accordance with the decision of the arbitrator was a breach of the

contract. The relief given was not the invalidation of the election but the nullity of the votes

cast by Haley.

DEL. GEN. CORP. LAÿ§§ 212(e)~18(c) , MODEL BUS.CORP.ACT §§ 7.22(d), 7.31

Del. § 218(c) states that "an agreement between two or more shareholders, if in writing and

signed by parties thereto, may provide that in exercising any voting rights, the shares held by

them shall be voted as provided by the agreement, or as the parties may agree, or as determined

in accordance with a procedure agreed upon by them".

  
A voting trust is a device by which shareholders separate (i) voting rights in, and the legal title

to, their shares from (ii) the beneficial ownership of the shares. This is accomplished by

conferring the voting rights and legal title on one or more voting trustees, while retaining the

ultimate right to distributions and appreciation. Voting trusts are an effective and a moderately

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agreements, to allocate voting control in other than a pro rata manner, or to preserve the

solidarity of a faction consisting of less than all the shareholders.

N..B.C.L. §§ 609(e), 620(a)·(b), 621(a)

(c) Classified Stock and ÿeighted Voting

SHAREHOLDER CONTROL- Limitations on Control based on Stock Class

In a majority of publicly held corporations, only common shareholders having voting rights,

and each share of common stock carries one vote. A corporation may have two or more classes

of common stock, each with different voting rights. A corporation may prescribe whatever

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limit or negate the voting power of any share. A corporation has the right to establish classes of

stock in regards to preferential distribution of the corporation's assets. However, the

shareholder's right to vote is guaranteed, and must be in proportion to the number of shares

possess.

In the troh v. Blackhawk Holdin Co , the company has two classes of shares: Class ANormal

shares. Promoters purchase 87,868 shares for $3.40 per share and Class B - Voting

rights, but no economic rights (i.e., no rights to dividends or assets in dissolution), Promoters

purchase 500,000 such shares for quarter of a cent per share. Its Promoters then sell 500,000

Class A shares to the public at $4 per share. Plaintiff argues that Class B shares are not shares,

since shares are defined to be a proprietary interest in the corporation, and (according to the

plaintiff) control rights without economic rights are not a proprietary interest. The court

decides that Class B shares that are not entitled to dividends upon liquidation per articles are

still legally stocks because law only requires that stock enable owner to participate in control of

corporation, in its surplus or profit or in distribution of assets. This case demonstrates that we

can have uneven voting rights even when shares follow a "one share, one vote" rule.

§ 21.152 Classes and series of shares,

§ 21.153 Designations, Preferences, Limitations and Rights of a class of series.

In Providence & ÿorcester Co. v. Baker, 378 A.2d 121 (De.l977), a form of weighted voting

was achieved by limiting the number of votes that could be cast by any one shareholder.

P&ÿ's certificate provided that aSH is entitled to one vote per share for the first 50 shares he

owns, and one vote for every 20 shares above the first 50. Baker argued that a provision

restricting voting rights based on the number of shares held by an individual shareholder is not

permissible. The Delaware Supreme Court upheld a provision in a corporation's Articles of

Incorporation restriction Del. § 212(a) , the voting rights based on the number of shares held by an

individual shareholder. The provision limited voting rights based on the number of shares held by

an individual shareholder. The court concluded that "if the General Assembly intended to bar

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uch prohibition would

appear in Del. § 212(a).

Defendant N. M. Cohen and Samuel Lehrman, deceased father of plaintiff Jacob Lehrman,

created Giant Food Inc. in Delaware in 1935. Ownership and control was divided between the

Cohen family through Class AC stock which could elect two directors, and the Lehnnan family

through Class AL stock which could also elect two directors. After disputes arose over the

years, stock ownership was changed so that issued Class AC and Class AL stock remained

equal, and a new Class AD stock was created and issued with voting rights to elect a tiebreaking

fifth director, but no rights for distributions or remunerations over the $10 par value.

A single share of Class AD was issued to counsel Joseph B. Danzansky, who used it to elect

himself as the fifth director. ears later, the company voted Danzansky as president, with AC

and AD directors voting for and AL directors voting against. Lehrman sued, claiming that the

Class AD stock is really a voting trust, which is void because the Delaware Voting Trust Statute

§ 218 requires voting trusts to have a 10-year limit. The Class AD stock is not a voting trust.

The criteria under Delaware precedence for finding a voting trust is that (1) the voting rights of

the stock are separated from the other attributes of ownership; (2) the voting rights granted are
intended to be irrevocable for a definite period of time; and (3) the principal purpose of the

grant of voting rights is to acquire voting control of the corporation. Here the first prong of the

test is not met: Class AD stock does not separate voting from other attributes of ownership,

such as dividends-that stock simply has no other attributes. The stock does dilute the voting

power of the AC and AL classes, but that is true of any new stock issuance that cannot be said

to have separated ownership attributes from those other classes of stock. The Voting TrustStatute

disfavored separation of the vote from the stock, not separation of the vote from stock

ownership. Nothing expressed or implied in § 218 requires that all stock have both voting

powers and proprietary interests. This stock is analogous to non-voting stock, which has

proprietary interests but no voting powers. The Voting Trust Statute was meant to avoid secret,

uncontrolled groups of stockholders acquiring control, which is not the case here.

In another case of Sutton v. Sutton, Court of Appeals of New ork, 1994, there was a specific

need to describe the meaning of the term "specifically" which was added to the Section 616(b) of

the Business Corporation act. This tenn was intended to define the need for unanimous

approval for passing any amendment of the certificate of incorporation. The petitioners argued

that the term "specifically'' would provide the minority to deadlock the situation. However the

court passed a ruling that, the section should be read as, requiring an explicit certificate

provision governing the amendment of unanimity provisions. If not, the majority will not be

able to conduct the business of a corporation in the face of opposition from the minority.

In the Essex Universal Corp.v.ates, ates agreed to sell 28% of Republic Pictures to Essex.

As part of the deal, ates promised to deliver a board loaded with Essex's nominees. He had

each of his directors resign (one at a time) while the other board members replaced them with

Essex's nominees. ÿhen the Republic stock rose, ates tried to renege on the deal, claiming

that delivery of an Essex dominated board was legally impermissible. In this case, Plaintiff

Corporation purchased controlling shares in stock of company from defendant pursuant to

contract allowing defendant to retain certificates as security and that gave plaintiff right to
demand resignation and replacement of majority of purchased company's board of directors.

Lower court found agreement invalid. Court disagreed because though agreement to sell

control of management of corporation by itself is invalid, plaintiff was actually buying

substantial percentage of company's stock. It was not improper for defendant to derive

premium from sale of controlling block of stock. There was no suggestion that transfer of

control carried any threat to interests of company or its shareholders. Because contract was for

ownership of majority of stock and because it was permissible for seller to choose to facilitate

immediate transfer of majority control, contract was permissible. It is illegal to sell a corporate

office or control by itself (i.e., not accompanied by the stock that would provide voting

control).

Chief Judge Lumbard's opinion is that the sale of a control block of stock at a premium is

permissible, but sale of an office is not. It is okay to receive payment for the immediate transfer

of management control to one who has achieved majority share control but would not

otherwise be able to convert that share control into operating control for some time. ÿere

Essex buying a majority interest in the firm, the arrangement would be unobjectionable, since

Essex would eventual1y obtain control of the board, but one must bear in mind the prohibition

of a naked office sale. Essex is buying less than a majority, but because Republic is publicly

held, Essex's 28% gives it control of the board anyway. If so the arrangement is permissible.

Unless ates can prove that 28% would not Jet Essex gain control of the board.

Judge Clark is of the opinion that this should be decided on their facts without so much

doctrinal guidance. Summary judgment is improper. Friendly states that directors owe a

fiduciary duty to all Shareholders, not just to the controlling Shareholder. ÿhen directorsreplace

resigning directors, they must elect the nominee whom they believe would best serve

the interests of the corp. Directors who automatically elect the purchaser's nominee violate

that fiduciary duty. But, this conclusion is unexpected and should not be applied retroactively

so reversal is proper. If ates held only 3% of the stock it would not have been okay because it
is clear he is not selling control, but the directors' positions. es, it is a lot more effort to raise

the value of the company and therefore the value of your stock rather than just exploit for your

own gain. Under N and Delaware law there are restrictions (or potential restrictions) against

removing directors without cause.

Reversed and remanded grant of summary judgment as it was not improper for defendant to

derive premium from sale of controlling block of stock, plaintiff was buying substantial

percentage of stock, and it was permissible for seller to choose to facilitate immediate transfer

of management control.