240 Planning and Forecasting
course, be accomplished totally separately from the ownership of securities,
through salaries based upon 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 meet-
ing, 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 upon the individual state’s corporate law, although
the Securities and Exchange Commission requires 30 days’ notice for publicly
traded corporations. No action may be taken at a meeting unless a majority of
voting shares is represented (known as a quorum). This results in the aggres-
sive solicitation of proxy votes in most corporations with widespread stock
ownership. Unless other wise provided (as for a sale or dissolution of the com-
pany, for which most states require a two-thirds vote of all shares), a resolution
is carried by a majority vote of those shares represented at the meeting.
The preceding rules require 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 upon 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 their votes to support a sin-
gle candidate, individuals with a significant minority interest can guarantee
themselves representation on the board.
More directly (and in states which do not allow cumulative voting),
Michael could insist upon two different classes of voting stock, differing only
in voting rights. Bruce and Erika would each own 1,000 shares of class A stock
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 deci-
sions in any case, but at least Michael would have access to the deliberations.
In the absence of a meeting, stockholders may vote by unanimous written
consent, where each stockholder indicates his approval of a written resolution
by signing it. This eliminates the need for a meeting and is very effective in
corporations with only a few stockholders (such as our hotel operation). Unlike
the rules governing stockholders’ meetings, however, in most states unanimity
is required to adopt resolutions by written consent. This apparently ref lects the
belief that a minority stockholder is owed an opportunity to sway the majority
with his arguments. A few states, notably Delaware, permit written consents of
a majority, apparently reacting to the dominance of proxy voting at most meet-
ings of large corporations, where the most eloquent of minority arguments
would fall upon deaf ears (and proxy cards).