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BOARD OPERATIONS

HOW CO-OP/CONDO BOARDS OPERATE

What Is Cumulative Voting and How Do You Keep It from Mucking Up Elections?

Phyllis H. Weisberg in Board Operations on November 22, 2012

New York City

Cumulative Voting
Nov. 22, 2012

This board had never before realized that its elections were governed by cumulative voting, in which every shareholder has the number of votes equal to the number of vacancies multiplied by the number of shares: in an election involving seven seats, a shareholder with 300 shares would have 2,100 votes (7 x 300), all of which can be cast for one candidate (sometimes referred to as bullet voting), or allocated in whatever proportion the shareholder wishes among two or more of the candidates.

As a result, with the board voting its proxies via “straight” voting (in the above example, casting 300 votes for each of seven candidates), the opposition group was able to elect more members to the board than it might otherwise have been able to do had the board also utilized cumulative voting. It could have actually been worse — under the mathematics of cumulative voting it is possible that a well-organized minority can actually gain control of the board against an unsuspecting majority. 

Legal Lesson

What could this board have done to avoid this result? Many co-ops were formed with cumulative voting inserted in the certificate of incorporation to protect sponsor representation on the board. The first thing any board should do, even if it does not anticipate a contested election, is consult with counsel well in advance of the annual meeting in order to make sure it understands the voting process.

If the certificate of incorporation prescribes cumulative voting, then it is important, well before the meeting, to understand the mechanism and how each side can maximize its votes. This is something done through a process of recasting, whereby after the vote is cast, each side can recast its discretionary proxies to maximize their impact for each side. Some boards — realizing that cumulative voting exists and aware of its many complexities — have sought to have the shareholders amend the certificate of incorporation to eliminate it.

Views differ about the fairness of cumulative voting, but in a building in which it exists, it is important that each side use it properly so that the impact of the proxies held by each side is maximized, thereby making sure every vote counts.

 

Phyllis H. Weisberg is a partner a Montgomery McCracken Walker & Rhoads.

Photo by Carol Ott

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