When forming a new corporation, Indiana entrepreneurs have a lot of decisions to make. One of those decisions is whether or not to allow for cumulative voting for directors of the corporation. A provision allowing or precluding cumulative voting is typically included in the articles of incorporation that are filed when the corporation is initially formed. But what exactly is cumulative voting, and how does it work?
In most corporations, owners of certain classes of stock are allowed to vote for the company’s board of directors. In traditional shareholder voting, a shareholder can cast no more than one vote per share for each open seat on the board. Thus, if three directors are being elected and a shareholder owns 500 shares, the shareholder has 1,500 total votes but can only vote a maximum of 500 shares for each candidate.
With cumulative voting, the shareholder in the above example would be allowed to take the 1,500 total votes and vote them all for one candidate, or split them up any way they choose.
Cumulative voting is generally viewed as favoring minority shareholders. Those who own a small stake of shares in the company will often be outvoted when it comes to electing an entire slate of directors. But, by voting all their shares for one candidate, minority shareholders have a greater chance of electing at least one representative to the board.
Issues like whether or not to allow cumulative voting can have a significant impact on corporate governance. Those who are starting a company may want to get more information to get insight on this and other business formation issues.
Source: Securities Exchange Commission, “Cumulative Voting,” accessed Dec. 13, 2015