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Explaining Cumulative Voting to Cooperative Corporation

A special meeting called for the removal of a director of a cooperative corporation led to the obvious question; what percentage of votes would be required to remove the director? A majority of all shares? A majority of just the shares present at the meeting? A super-majority? The answer for this particular cooperative Adam Leitman Bailey, P.C. correctly determined lay in a brief, yet densely worded provision of New York State Business Corporations Law (BCL) that controls when a corporation uses cumulative voting to elect directors.

Cumulative voting allows for proportionate representation that depends on the number of shares each shareholder entitled to vote holds. When electing directors (typically at the annual shareholder meeting) each shareholder gets a number of votes equal to the number of shares they own multiplied by the number of seats up for election. The shareholder may then cast all of his votes towards one single director, or he may distribute his votes among a number of candidates. To illustrate with an example, if there were five seats up for election, a shareholder who owned 100 shares would get 500 votes, and the shareholder can allocate those 500 votes in any manner that adds up to 500 (e.g. 500 votes for a single candidate, or 250 votes for two candidates, or 100 votes for each of five candidates, or 497 votes for one candidate, two votes for another and one vote for a third, etc.). The method of voting is established by the corporation’s governing documents.

When a corporation uses cumulative voting to elect directors, Business Corporations Law § 706(c) provides a special rule for the removal of a director: “No director may be removed when the votes cast against his removal would be sufficient to elect him if voted cumulatively at an election at which the same total number of votes were cast and the entire board . . .were then being elected.” In other words, a director cannot be removed if the number of votes cast against his removal is equal to or more than the minimum number of votes necessary to guarantee election in the original election.

The words are certainly confusing, but it can be neatly expressed with a mathematical formula. And for those whose memories of high school algebra are not so fond, skip the formula, and go directly to the few examples that follow.

The formula: P = 1/ (D+1) where “P” represents the minimum percentage of votes a candidate would have to receive in order to assure being elected in a vote for the full board of directors, and “D” represents the number of seats on the board of directors.

For this particular cooperative, where there are five directors on the board, D = 5, and P would equal 16 2/3%. [1/ (1+5)].

Thus, by operation of the Business Corporations Law, if more than 16 2/3% of the votes cast are against removal of the director (i.e. fewer than 83 1/3% vote for removal) the director will not be removed. Thus, even an overwhelming super-majority of 75% would not be enough to remove a director.

It is a counter-intuitive result, so again it is best to illustrate with examples:

Example 1: If there are 6,000 shares represented at the special meeting, and the vote is 3,000 for the director’s removal and 2,999 against, the motion would NOT carry (and the director would not be removed), because more than 16 2/3 percent (1,000) voted against removal.

Example 2: If there are 6,000 shares represented at the meeting, and the vote is 4,500 for removal and 1,500 against, the motion again would NOT carry, because more than 16 2/3 percent (1,000) voted against removal.

Example 3: If there are 6,000 shares represented at the meeting, and the vote is 5,001 for removal and 999 against, the motion would carry (and the director would be removed), because fewer than 16 2/3 percent (1,000) voted against removal.

Leading up to the special meeting Adam Leitman Bailey, P.C. needed to carefully explain this process to the directors and shareholders and educate them on why, even if a majority voted for the director’s removal, it would not be sufficient if the votes fell short of the statutory requirement. The firm also attended the special meeting to make sure that all questions about the process were answered, and that the votes were properly counted and the results determined in accordance with the Business Corporations Law.

Leonard Ritz and Adam Leitman Bailey worked with the client for Adam Leitman Bailey, P.C.

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