Voting Rights Generally

One Share, One Vote Rule

Today one share one vote serves as a default rule for the rights, preferences, and privileges of capital stock. As such, all equity investment in a corporation is treated as stock and deemed to have the same voting rights and rights to the income and assets of the company, unless the company specifies otherwise in its articles of incorporation. Where the company seeks to make distinctions between the relative rights of equity investments, these distinctions must be described in the articles of incorporation. In addition to distinctions in rights to income and assets, the articles can specify differences in voting rights between different classes of shares. Typically these differences exist between common and preferred stock.

[A] Alteration by Articles.

With few exceptions, the statutes provide that only a provision in the articles of incorporation can change the one share, one vote rule. The rule is strictly enforced; attempts to alter the rule by documents other than the articles of incorporation have been unsuccessful. Once the articles so permit, a corporation’s board of director may issue stock with such voting and other designations as described in the articles of incorporation.

[b] Class and Series Voting.

Voting rights may be varied by establishing several classes or series of shares, each with different voting rights. For example, common stock may be divided into various classes with each class receiving different voting rights and rights to income. Corporations with multiple classes of common stock are uncommon. Far more common is the issuance of common shares which are given full voting rights while denying voting rights to the preferred shares which usually have superior rights to dividends and payments upon liquidation. Or the preferred shares are given contingent voting rights exercisable upon the happening of a specified event.

All shares within the same class, and all shares within a series, must have the same voting rights. A company remains free to create one or more classes or series of stock with limited voting rights as long as the aggregate of some portion of the existing classes and series of stock together may assert unlimited voting rights.

[2] Fractional Shares

Nearly all the state corporation laws authorize the issuance of fractional shares. Fractional shares are usually issued in connection with stock splits or share dividends.

[3] Bondholders and Other Debt Security Holders

A number of state statutes allow corporations to give bondholders the right to vote. Usually the statute requires that the right be expressly granted in the articles of incorporation. Where debt holders are given voting rights and where the articles of incorporation so provide, such debt holders will be ‘‘deemed to be stock holders, and their bonds, debentures or other obligations shall be deemed to be shares of stock.’’ As with the voting rights of preferred stock, the voting rights of bondholders may be limited to certain matters or may be made contingent on the occurrence of certain events, for example a default in the payment of interest on the bond. In the absence of a statutory provision reserving to the corporation the right to confer voting and other rights on bond-holders, holders of debt are not entitled to vote.

[4] Voting Rights of Non-Voting Shareholders

Corporations may wish to issue non-voting shares for a variety of reasons. For instance, promoters may employ non-voting shares to raise large amounts of capital for the corporation. They retain control of the corporation by issuing voting shares to themselves and issuing non-voting shares to those financing the corporation, who may be more interested in securing a return on their investment than in controlling the management of the corporation.