parent nodes: agency costs | closely held corporation | control of corporation | corporate finance | corporation law | directors | promoters
voting control
Different classes of stock may have different rights as to the "economic incidents" of stock ownership, such as a right to dividends, or the "management incidents" of ownership such as voting rights. [Stroh v Blackhawk Holding Co] (holding that class of shares with voting rights but no dividend rights was still "stock" under state law, which defined shares as division of "proprietary interest").
Shareholders hold voting rights because they only control the residual value of the corporation; voting thus allows shareholders to influence managers' behavior, given that they lack the detailed contractual remedies of creditors. Persons who hold more voting rights than economic rights could effectively demand holdout payments from the persons with economic investments by threatening to mismanage the firm that they control. Likewise, persons holding voting control could mismanage the firm in order to drive the price down, make the firm cheaper, and gain economic control themselves.Note that any number of devices (from loan covenants to voting trusts) can give this power to other investors, including creditors and preferred stockholders.
At the same time, allowing disparate groups of shareholders to vote increases agency costs, and shareholders typically hold homogenous views (so that the interests of one group likely mirror the interests of another)
Statutes
(a) Every corporation may issue 1 or more classes of stock or 1 or more series of stock within any class thereof, any or all of which classes may be of stock with par value or stock without par value and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation . . .
DGCL § 151(a).
(c) Shares of its own capital stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes. Nothing in this section shall be construed as limiting the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.
DGCL § 160(c)
Case law
Voting right distribution
Voting structures effectively allow promoters to keep voting control in their own hands. [Stroh v Blackhawk Holding Co] (allowing corporation to issue non-dividend stock with voting rights, where voting-only stock was sold only to promoters). Note that excessive voting power could cause cycling or other Arrow-paradox problems if the voters' preferences are inconsistent; allowing firms to effectively contract out of voting rules can thus ensure stability.
Shareholders might want different levels of control versus amount of equity investment (that is, a person might want less cash but more control, or vice versa) so that persons with more information (ex. managers) have more control than persons who have more investments but need low agency costs. Likewise, investors may have different levels of attitudes towards risk, and different gross amounts of investment might reflect different amounts of risk borne by different investors (ex. where a smaller absolute investment might reflect a larger relative personal risk).
Corporations have many ways to contract out of ordinary voting rules. Note that corporations might also resort to "cumulative voting" where each shareholder gets votes equal to the number of shares owned times the number of seats to be filled, to be allocated as each voter wants. Cumulative voting can protect against the possibility that a person with an absolute majority of votes always controls voting. Corporations can also use such methods as board-specific stock (ex. a special class of stock that has sole power to pick a certain board member), voting trusts that allow other shareholders to act as trustees for a stock's voting, thus allowing special stock to be sold (through the trust) without giving away voting rights, irrevocable proxies, or vote pooling arrangements.
Elections
Plaintiffs must show that a corporation's "primary purpose" was to "interfere with or impede exercise of" voting rights in order to challenge corporation conduct of elections; otherwise, the business judgment rule applies. [SWIB v Peerless Corp] (holding that corporation's "primary purpose" was to interfere with rights where it kept voting on a proposal open, but then informed only favorable shareholders that voting was still possible in order to push its proposal through). However, if the plaintiffs carry their burden, then the corporation must show a "compelling justification" for its actions. [SWIB v Peerless Corp] ,
Note that proxy voting is not anonymous, which allows for solicitation of individual voters.
Voting arrangements
Shareholders can make binding contracts to vote as shareholders, [Ringling Brothers Barnum and Bailey v Ringling] (upholding voting arrangement to vote for certain directors), but not to bind themselves as directors. [McQuade v Stoneham] (striking down agreement by shareholders to vote a particular manager into office). All agreements among shareholders binding the actions of directors are void. [McQuade v Stoneham]. Once a person becomes a director, they take on a fiduciary duty to the corporation that they did not have as shareholders; they are thus called upon to exercise an independent judgment as to running the corporation's specific affairs. Furthermore, allowing directors to bind their actions creates too much risk of oppressing minority voters.
However, if there are no third-party minority shareholders that will be harmed, an agreement to bind director actions may be valid in the case of closely held corporations with low transaction costs. [Clark v Dodge]. Shareholder agreements are binding if unaminous. [Clark v Dodge].
Note that specific performance is not available in these contracts generally, since they call for personal service. O
Cases
[Stroh v Blackhawk Holding Co] (holding that IL statute allowing corporation to create different types of shares with "preference" as to the corporation's assets allowed corporation to create stock without right to dividends, despite statutory right of shareholders to vote, on grounds that state law protected only the "management incident of ownership", where only promoters held voting-only stock)
[Providence and Worcester Co v Baker] (upholidng stock classes under § 151(a) that redistributed voting rights so that plaintiff, who held 28% of outstanding stock, only got 3% vote)
[SWIB v Peerless Systems] (finding that corporation's action to keep voting open on a proposal to grant stock options to directors, where the corporation then only solicited votes form shareholders favorable to the proposal, was with "primary purpose" to "interfere with or impede exercise of" voting rights, but refusing summary judgment as to whether the corporation had a "compelling interest" to do so, holding that inequitable conduct by the corporation does not pass muster as a "compelling interest" simply because it was legally permissible)
[McQuade v Stoneham] (invalidating an agreement with shareholders requiring them to use their "best endeavors" to elect certain officers, including the plaintiff, by refusing to extend "the power to unite" to "limitations on the power of directors to manage the bvusiness of the corporation by the selection of agents at defined salaries")
[Ringling Bros Barnum and Bailey v Ringling] (upholding agreement by shareholders of closely held corporation either to agree on how to vote their shares or to submit to third party arbitrator to decide for them, by holding that the arbitrator's function was permissible, but that "no decision of the arbitrator could ever be enforced if both parties ... were unwilling that it be enforced," that the agreement was not a delegation of voting power, but an agreement by each of the parties to vote in a certain way, that "a group of shareholders may, without impropriety, vote their respective shares so as to obtain advantages of concerted action," that an agreement to vote together forms a valid contract, so that a failure to vote as the agreement prescribed was breach)
[alias: shareholder voting]