Cumulative voting is an important legal instrument to protect the rights of minority shareholders. However, this instrument comes into effect only in case minority shareholders understand and dare use it, especially in this General Meeting of Shareholders season.
Cumulative voting – an instrument to protect minority shareholders
Cumulative voting is a striking voting method in the joint-stock company. According to this method, each shareholder shall have as his total number of votes the total number of shares he owns multiplied by the number of members to be elected to the Board of Directors or Inspection Committee, and accumulate all his votes for one or more candidates. Therefore, what are the advantages of the cumulative voting in comparison with the normal voting?
The basic purpose of the cumulative voting is to intensify the attendance of minority shareholders in the Board of Directors and the Inspection Committee of the joint-stock Company, and ensure the harmonization of the rights to control and inspect the company between shareholders groups.
Assuming that the company consists of three shareholders with the numbers of shares in proportion as 10%, 22% and 68%, and it will vote for 5 members of the Board of Directors in this term of office. Pursuant to the normal voting in which a shareholder will have the number of votes equal to the number of shares they hold, it is assured that the five members of the Board of Directors of this term will be chosen by the shareholder with 68 percent of the voting shares without the other shareholders’ opinion. It is simply rooted from the provision in which a resolution of the General Meeting of Shareholders shall be approved by a number of shareholders representing at least 65 percent of the total voting shares of all attending shareholders. In this case, this shareholder holds up to 68 percent of the voting shares.
Nevertheless, according to the cumulative voting, the total of voting shares of shareholders in the company will be increased by 5 times, corresponding to the number of members of the Board of Directors in the new term, as such, the numbers of shares will be 50%, 110% and 340%. When shareholders accumulate all their votes for a candidate whom they choose, the voting result will be more exciting and unpredictable.
In the abovementioned example, the shareholder with 22 percent certainly has the right to choose one member of the Board of Directors by accumulating 110 percent of his/her votes for the candidate whom he/she nominates, the one with 68 percent will accumulate 300 percent of his/her votes for 3 candidates that he/she nominates leading to three positions of Members of the Board of Directors. As a result, among 5 members, there are 3 persons chosen by the shareholder with 68%, one chosen by the shareholder with 22%. The remaining post will be decided in the competition of shareholders with 10% and 68%. The shareholder with 10% still holds 50 percent of the voting shares while the last candidate of the shareholder with 68% only has 40% of the voting shares, which denotes that advantages belong to the one with 10%. If he luckily has 10% of the remaining voting shares of the shareholder with 22%, he will have 60% of the voting shares and will be elected. As such, the best result for the minority shareholders is that they will have two positions in the Board of Directors, which is much greater than the normal voting.
The next preeminent point of the cumulative voting is the method in choosing elected persons. The elected members of the Board of Directors or the Inspection Committee are determined following the voting shares counted from top to bottom, starting with the candidate gaining the highest voting shares until the provided number of members is reached.
This stipulation denotes that candidates becoming Members of the Board of Directors or the Inspection Committee depend on their positions in the voting result list, rather than mandatorily have 65% of the voting shares of all attending shareholders. In respect of the foregoing example, the candidate nominated by the shareholder with 10% still has an opportunity to be elected even when he only gets 50% of the voting shares, as long as the voting result indicates that he is at 5th position from top to bottom. The reason for choosing elected candidates is that shareholders have used up their voting right in only one time, and as a consequence, the advantages of majority shareholders no longer exist since every shareholder has used up his voting right.
Decree 102/2010/CD-CP guiding the cumulative voting also clarifies that the company will revote in case there are at least 2 candidates gaining the equal number of the votes for the last position of Member (only for the last member). However, it will apply only to candidates with the equal number of votes. Even if the company has introduced some criteria to choose members of the Board of Directors and the Inspection Committee in the voting regulations or the charter, it can depend on such criteria to choose the elected persons without revoting.
Misconception in the cumulative voting
Not all shareholders understand clearly about the cumulative voting, neither do the joint-stock companies. Many companies’ idea remains that the cumulative voting is similar to the normal one, which leads to a mistake between the ratio of the voting shares to approve a resolution of the General Meeting of Shareholders and the elected ratio in the cumulative voting.
According to the provisions of the Law on Enterprises, many enterprises interpret that 65% is the minimum ratio to pass a resolution of the General Meeting of Shareholders and voting is a method to approve such resolution as well, hence, a candidate is only elected in case he gets 65% of the voting shares. We need to re-examine Article 104 of the Law on Enterprises to understand precisely this stipulation.
Article 104 stipulates that a resolution of the General Meeting of Shareholders shall be passed in a meeting when all the following conditions are satisfied: (a) it is approved by a number of shareholders representing at least sixty five (65) percent of the total voting shares of all attending shareholders, (b) in respect of other resolutions (on classes of shares and total number of shares of each class which may be offered; on amendments of and additions to the charter of the company; on re-organization or dissolution of the company, etc.), the approval by a number of shareholders representing at least seventy five (75) percent of the total voting shares of all attending shareholders shall be required, (c) voting to elect members of the Board of Directors and the Inspection Committee must be implemented by the method of cumulative voting.
Thus, this provision classifies the decision-making of the General Meeting of Shareholders into 3 different cases, provided for in 3 distinctive paragraphs accompanied with 3 different ways to make decisions. As a result, it is impossible for the 65% in paragraph (a) to be applied for the cumulative voting in paragraphs (c) as well.
In practice, due to the misconception, many candidates of the Board of Directors / Inspection Committee fail when they cannot reach the ratio 65%, which in fact they must have been elected following the way of choosing the elected persons in the cumulative voting. As analyzed above, the cumulative voting is “one time to death” voting, which means voting until the result is brought out, regardless of the ratio 65% when making normal decisions.
It should be noted that even the Court confuses in interpreting the cumulative voting. In a real case, a Court annulled a resolution of the General Meeting of Shareholders of a joint-stock company, based on the argument that even in case of the implementation in conformity with the cumulative voting principle, the company still had to ensure the ratio 65% of the concurring votes of all attending shareholders. This conception is not consistent with the Law on Enterprises and erodes the preeminence of the cumulative voting.