Common Stock Voting Rights Questions for the Series 7 Exam

By Steven M. Rice

The Series 7 exam will ask you about corporations that issue common stock (as well as other securities) to raise business capital. As an equity security, common stock represents ownership of the issuing corporation. If a corporation issues 1 million shares of stock, each share represents one-millionth ownership of the issuing corporation. Read on for the ins and outs of common stock.

Stockholder’s voting rights information for the Series 7 Exam

One of the most basic rights that most common stockholders receive is voting rights — although rarely corporations issue nonvoting common stock. Nonvoting stock may be issued by corporations to protect their board of directors, but it’s not as attractive to investors who like to have some control over who’s running the company. Most preferred stock is nonvoting.

When investors have voting rights, every so often a corporation may have those investors vote to change members on the board of directors. Although investors may be able to vote on other issues, the Series 7 focuses on voting to change board members.

Because having all stockholders actually attend the annual corporate meeting to vote would be difficult, stockholders usually vote by proxy, or absentee ballot.

Statutory (regular) voting for shareholders

Statutory, or regular, voting is the most common type of voting that corporations offer to their shareholders. This type of voting is quite straightforward. Investors receive one vote for every share that they own multiplied by the number of positions to be filled on the board of directors (or issues to be decided). However, investors have to split the votes evenly for each item on the ballot.

For example, if an investor owns 500 shares and there are four positions to be filled on the board of directors, the investor has a total of 2,000 votes (500 shares × 4 candidates), which the investor must split evenly among all open positions (500 each). The investor votes yes or no for each candidate.

Cumulative voting for holders of corporate stock

Cumulative voting is a little different from statutory voting. Although the investor still gets the same number of overall votes as if the corporation were offering statutory voting, the stockholder can vote the shares in any way she sees fit. Cumulative voting gives smaller shareholders (in terms of shares) an easier chance to gain representation on the board of directors.

For example, if an investor owns 1,000 shares and three positions on the board of directors are open, the investor has a total of 3,000 votes (1,000 shares × 3 candidates), which the investor can use to vote for any candidate(s) in any way she sees fit.

Cumulative voting doesn’t give an investor more voting power, just more voting flexibility. The only way to get more voting power is to buy more shares.

The following question tests your ability to answer a cumulative voting question.

Bella Bearishnikoff owns 800 shares of CBA common stock. It is time for CBA to hold its annual shareholders’ meeting, and there are four candidates for the board of directors. CBA offers its shareholders cumulative voting. Which of the following are acceptable votes from Bella?

I.    800 votes for each of the four candidates

II.    2,000 votes for one candidate and 400 votes for each of the other candidates

III.    3,200 votes for one candidate

IV.    3,200 votes for each of the candidates

(A)    I only

(B)    II and III

(C)    I, II, and III

(D)    I, III, and IV

The correct answer is Choice (C). Ms. Bearishnikoff has a total of 3,200 votes (800 shares × 4 candidates). Because CBA offers cumulative voting, she can vote the 3,200 votes in any way she likes. Statements I, II, and III are all correct because none of those choices require more than 3,200 votes. However, IV would require 12,800 votes.

As a side note, if the question had asked about statutory voting, the answer would have been Choice (A).