Cumulative Voting

At a co-op that has not had an election for many years, the same board has been re-elected unopposed. All of a sudden at an annual meeting a shareholder stands up and says, “I would like to run for the board.” Now we have a contested election.

We have to determine the correct method to vote for the board – straight or cumulative? If the election is not handled correctly, it could be subject to a court challenge. Before the annual meeting, check both the bylaws of the co-op and the certificate of incorporation. The bylaws will spell out the procedures for voting, but cumulative voting must be stated in the certificate of incorporation. There are situations where the bylaws will say cumulative voting and the certificate of incorporation will be silent. In such a case, you do not have cumulative voting; you have straight voting. You have to make sure that you are voting in the correct manner.

In straight voting, a shareholder can vote his or her exact number of shares for up to the number of vacant seats on the board. If there are six people running for five seats, a shareholder who owns 100 shares in the corporation would be able to vote up to 100 shares for five candidates. In cumulative voting, the shareholder multiplies the number of shares he or she owns times the number of seats on the board. In this case, with five seats up for grabs, the shareholder who owns 100 shares has 500 votes. That shareholder can take those 500 votes and place them all on one candidate, or split them between two, three, four, or five in any manner he or she chooses. But if this person votes for more than five individuals, the ballot would be invalid. So people have to be very careful to vote for no more than the number of vacant seats on the board.

How do we make sure that the shareholder knows exactly how many votes they have before an annual meeting in a building with cumulative voting? I recommend that the ballots all be pre-marked with the apartment number and the number of shares. Then have somebody do the math on the ballot showing that since you have 100 shares and there are five seats up for grabs, you have 500 votes.

Why would a co-op would use cumulative voting instead of straight voting? When they drafted these plans, many sponsors wanted cumulative voting so that, as they sold off apartments, they still held enough shares to put them on one individual and get that person elected to the board. Cumulative voting is designed so that a small group of shareholders, or one shareholder who has a large number of votes, can get representation on the board.

Once you’ve held a cumulative vote, all ballots should be collected and the inspectors of election should be very careful to make sure they count those votes exactly the way each shareholder has spelled them out – because they probably will be voted in an uneven manner.

Finally, check your bylaws and certificate of incorporation before every annual meeting. Make sure that you know exactly what those documents say so that you can vote in the correct manner and avoid the possibility of litigation down the road.

Andrew Freedland is a shareholder at Anderson Kill.