By Gerald P. (“Jerry”) Burleson, Member of the California Bar, and Robert Kaufman, J.D., University of San Diego School of Law (July, 2012 candidate for California bar exam)
The election the board of directors is one of the most important rights of a corporation’s shareholders. While the initial directors may be named in the articles or elected by the incorporators, all subsequent directors are elected by the shareholders. Cal. Corp. Code §§204(c), 210. Directors hold office for one year, with an exception for “listed” corporations (corporations having outstanding shares listed on an exchange such as the NYSE or NASDAQ), whose directors can serve for terms of two or three years. §§301, 301.5. At the expiration of their term, each director is either reelected or replaced by a successor. In California, there are a number of statutes governing the election of directors which protect the rights of the minority shareholders.
An annual meeting of shareholders must take place each year for the election of directors at a date and time specified in the bylaws. If an annual meeting is not held within 60 days after the date stated in the bylaws or, if no date for the meeting is stated, then if an annual meeting is not held within 15 months after the last annual meeting, any shareholder can force such a meeting to be held by petitioning the superior court to order a meeting. §600(c). Circumstances sometimes arise where a director seat opens up prior to the annual shareholder meeting. In such a case, the remaining directors may appoint a replacement director for the remainder of the term unless the director was removed, in which case that vacancy can only be filled by the approval of the shareholders, either at a special meeting or at the annual meeting. §305(a). While director elections are normally held at formal shareholder meetings, directors may also be elected by unanimous written consent of all shares entitled to vote. §603(a), (d).
Each outstanding share is entitled to one vote on each matter brought before the shareholders. If a corporate organizer intends to have multiple classes of shares and to restrict the voting rights of one or more share classes, the voting rights and restrictions must appear in the articles of incorporation. Otherwise, the default rule is that all shares are entitled to one vote per share. §700(a). The holder of the shares, which may be the owner of the shares, a trustee, guardian, or other fiduciary, may vote them at shareholder meetings. §§700, 702. Every person entitled to vote in a shareholder meeting may also authorize another person to act as a proxy who is empowered to vote the shares. §705(a). All shareholder votes, including for the election of directors, may be done orally, by ballot, or by other means, unless a shareholder demands ballot voting, in which the voting must be conducted by ballot. §708(e).
The shareholders of privately held California corporations (those not listed on the New York Stock Exchange or NASDAQ) cannot be denied the right to cumulative voting of their shares for the election of directors. Cumulative voting means that a shareholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which her shares would normally be entitled to, or the shareholder may distribute the shareholder’s votes among the candidates on the same principle as the shareholder sees fit. To exercise this right, the name(s) of the candidate(s) for whom the shareholder intends to cast her votes must be placed in nomination AND the shareholder must give notice of her intent to cumulate her votes PRIOR to the vote for directors at the meeting. §708(a)-(b).
For example, if a corporation has 500 shares outstanding and a shareholder owns 100 shares entitled to one vote each, that shareholder may multiply the 100 shares by the number of director seats to be filled. If there is a five-person board and all five seats are open for election, that shareholder may cast 500 (100 x 5) votes for one candidate or among more than one of the candidates. If there are only two shareholders and the majority shareholder owns 400 of the 500 shares outstanding, he may cast 2,000 (400 x 5) votes among the five director seats. To ensure that the majority shareholder’s candidates are elected, the majority owner will have to cast 500 votes for each of four director seats, giving him four of his candidates, but allowing the minority shareholder to elect the fifth candidate if she puts all of her 500 votes towards that candidate.
Finally, shareholders can also remove any directors from the board without cause at any time as long as the removal is approved by a majority of the outstanding shares (not just a majority of the shares voting). §303(a). Directors elected through cumulative voting are protected from removal by the majority so long as the votes cast against their removal would be sufficient to elect the director using cumulative voting. §303(a)(1). Unless the entire board is removed, that director cannot be removed simply by the majority shareholders.
The cumulative voting rules as discussed above give minority shareholders in California a better shot at having at least some representation on the corporation’s board of directors.