Discussion Question:

Common shareholders are the owners of a company and they have a right to elect Board of Directors to make decisions for the company. A general meeting is held by the company in which every shareholder uses his/her right to vote for the selection of the directors. There are two voting methods commonly used by the companies i.e. straight voting and cumulative voting. It is generally considered that straight voting method does not protect the rights of minority shareholders whereas cumulative voting method does so. You are required to briefly discuss that how cumulative voting method protects the rights of the minority shareholders?

Idea Solution & Voting Methods Explanation

With straight voting, you have a number of votes equal to the number of shares you have, and you vote on each director’s seat separately.

But with cumulative voting, the number of votes you have is the number of shares you have times the number of directors’ seats there are.

Cumulative voting

Method of voting that enables a minority group of shareholders to obtain some voice in the control of a corporation. Normally, shareholders must apportion their votes equally among the candidates for the board of directors. Cumulative voting allows them to vote all their shares for a single candidate. The number of shares required to elect a desired number of directors (NR) is calculated by the formula:
NR = [(DN ¥ TN)/(N + 1)] + 1

where DN = number of directors stockholder desires to elect,TN total number of shares of common stock outstanding and entitled to be voted, and N = total number of directors to be elected.

For example, a company will elect six directors. There are fifteen candidates and 100,000 shares entitled to be voted. If a group desires to elect two directors, the number of shares it must have is:

[(2 ¥ 100,000 shares)/(6 + 1)] + 1 = 28,572 shares

Note that a minority group wishes to elect one-third (two out of six) of the board of directors. It can achieve its goal by owning less than onethird (28,572 shares out of 100,000 shares) the number of shares of stock.