Common Stock Features

The term common stock means different things to different people, but it is usually applied to stock that has no special preference either in receiving dividends or in bankruptcy.

Shareholder Rights The conceptual structure of the corporation assumes that shareholders elect directors who, in turn, hire management to carry out their directives. Shareholders, therefore, control the corporation through the right to elect the directors. Generally, only shareholders have this right.

Directors are elected each year at an annual meeting. Although there are exceptions (discussed next), the general idea is "one share, one vote" (not one shareholder, one vote). Corporate democracy is thus very different from our political democracy. With corporate democracy, the "golden rule" prevails absolutely.3

Directors are elected at an annual shareholders' meeting by a vote of the holders of a majority of shares who are present and entitled to vote. However, the exact mechanism for electing directors differs across companies. The most important difference is whether shares must be voted cumulatively or voted straight.

To illustrate the two different voting procedures, imagine that a corporation has two shareholders: Smith with 20 shares and Jones with 80 shares. Both want to be a director. Jones does not want Smith, however. We assume there are a total of four directors to be elected.

The effect of cumulative voting is to permit minority participation.4 If cumulative voting is permitted, the total number of votes that each shareholder may cast is determined first. This is usually calculated as the number of shares (owned or controlled) multiplied by the number of directors to be elected.

With cumulative voting, the directors are elected all at once. In our example, this means that the top four vote getters will be the new directors. A shareholder can distribute votes however he/she wishes.

Will Smith get a seat on the board? If we ignore the possibility of a five-way tie, then the answer is yes. Smith will cast 20 X 4 = 80 votes, and Jones will cast 80 X 4 = 320 votes. If Smith gives all his votes to himself, he is assured of a directorship. The reason

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