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piece of the equity of their operation to reflect his contribution of the land, but wished to divide their
voting rights equally. The three could authorize a class of nonvoting common stock and issue, for
example, 1,000 shares of voting stock to each of themselves and an additional 1,000 shares of
nonvoting stock to Michael. As a result, each would have one-third of the voting control, but Michael
would have one-half of the equity interest.
Alternatively, Michael could be issued a block of preferred stock representing the value of the land.
This would guarantee him a fair return on his investment before any dividends could be declared to
the three of them as holders of the common stock. As a holder of preferred stock, Michael would also
receive a liquidation preference upon dissolution or sale of the business in the amount of the value of
his investment, but any additional value created by the efforts of the group would be reflected in the
increasing value of the common shares.
The previous information illustrates how one can separate and allocate decision-making control
differently from that of the equity in the business, as well as from the distribution of profits.
Distribution of cash flow can, of course, be accomplished totally separately from the ownership of
securities, through salaries based on the relative efforts of the parties, rent payments for assets leased
to the entity by the principals, or interest on loans to the corporation.
Stockholders exercise what voting power they have at meetings of the stockholders, held at least
annually but more frequently if necessary. Each stockholder of record, on a future date chosen by the
party calling the meeting, is given a notice of the meeting containing the date, time, and purpose of the
meeting. Such notice must be sent at least 7 to 10 days prior to the date of the meeting, depending on
the individual state‟s corporate law, although the Securities and Exchange Commission requires as
much as 40 days‟ notice for publicly traded corporations posting their proxy statements online. No
action may be taken at a meeting unless a majority of voting shares is represented (known as a
quorum). This results in the aggressive solicitation of proxy votes in most corporations with
widespread stock ownership. Unless otherwise provided (as with the two-thirds vote of all shares
required in most states for a sale or dissolution of the company), a resolution is carried by a majority
vote of those shares represented at the meeting.
The preceding rules lead to the conclusion that the board of directors will be elected by the holders
of a majority of the voting shares. Thus, in the earlier scenario, even though Bruce and Erika may
have given Michael one-third of the voting shares of common stock, as long as they continue to vote
together, Bruce and Erika will be able to elect the entire board. To prevent this result, prior to
investing Michael could insist on a cumulative voting provision in the charter (under those states‟
corporate laws that allow it). Under this system, each share of stock is entitled to a number of votes
equal to the number of directors to be elected. By using all one‟s votes to support a single candidate,
individuals with a significant minority interest can guarantee themselves representation on the board.
More directly (and in states that do not allow cumulative voting), Michael could insist on two
different classes of voting stock, differing only in voting rights. Bruce and Erika would each own
1,000 shares of class A and elect two directors. Michael, the sole owner of the 1,000 outstanding
shares of class B stock, would elect a third director. Of course, the board also acts by majority, so
Bruce and Erika‟s directors could dominate board decisions in any case, but at least Michael would
have access to the deliberations.