Story Case

The Cleveland Subway Corporation was organized in Ohio with a capital stock of 100,000 shares, par value $100 a share. There were two groups or syndicates, who together owned ninety per cent of the stock. The one group was known as the Blair syndicate owning 55,000 shares, and the other the Weston syndicate owning 35,000 shares. The corporation was controlled by a board of five directors, who were elected annually on the first Tuesday in January. Prior to the year of 1915 the two syndicates always worked together. But a conflict had been brewing, which culminated in an open fight at the election in January 1915, when the Blair syndicate deliberately tried to elect all of the directors out of its own number. The Weston syndicate, thereupon, determined to cast all of its votes for three men. It had a total of 35,000 votes which, of course, under the common law of corporations it could cast five times, that is the total for each of five directors. It was evident that this would not bring the syndicate anything, and it secretly requested each member and stockholder to vote all his votes three times, for three men, thus casting for each 58,333 1-3 votes. This, of course, was the equivalent of five times thirty-five thousand. The election was by secret ballot, and when the ballots were counted, it was shown that Henry Weston, George Fuller and Walter Montague, all of the Weston syndicate, each received a total of 58,333 1-3 votes, giving them control over the board of directors. The other syndicate had divided its votes among five men, hoping to elect them all. It was evident that the latter syndicate was out-maneuvered unless the election could be declared invalid. The controversy was brought into court, where the petitioners in the Blair group, contended that the election was void since (1) cumulative voting was invalid, and (2) the stock in both groups was voted under a voting trust, and therefore invalid. Are these contentions correct?

Ruling Court Case. The Commonwealth Vs. Pierce, Volume 104 Pennsylvania State Reports, Page 150

The Sharpsville Railroad Company was a railroad corporation, incorporated March 6, 1876, under the general incorporating laws of the state of Pennsylvania. Its capital stock consisted of 7,000 shares of stock, all of which had been issued before January 8, 1883. On that day, the company held an election for a president and six directors. It was admitted that there was no irregularity about the election, and that it was properly called, both as to the time and the place. At the election 6,433 shares of the total 7,000 were voted for directors; of these 3,396 were cast for Pierce and five others. The remaining 3,037 were cumulated and distributed among the four petitioners, giving each 4,557 votes. But, notwithstanding, the results here given, Pierce and his five associates assumed the powers of directors and refused to recognize the petitioners, who received 4,557 votes each. The latter, thereupon, brought this proceeding in the name of the state to have themselves declared the duly elected directors of the corporation.

It was contended by Pierce and his associates that cumulative voting was not permissible; and that they were, therefore, the duly elected directors of the corporation in question. Mr. Justice Gordon rendered the following opinion: "There is no doubt but that the relators or petitioners received the highest number of votes cast for directors at that election. It is said, however, that this result was brought about by the cumulation of the votes of the relators upon four out of the six candidates proposed for election. But this they certainly had a right to do, or we fail correctly to read the constitution of 1874: 'In all elections for directors or managers of a corporation, each member or shareholder may cast the whole number of his votes for one candidate, or distribute them upon two or more candidates, as he may prefer.' This section to us seems very plain and unambiguous. If there are six directors to be elected, the single shareholder has six votes, and contrary to the old rule, he may cast those votes for a single one of the candidate, or he may distribute them to two or more of such candidates as he may think proper. He may cast two ballots for each of three of the proposed directors, three for two, or two for one, and one each for four others, or finally, he may cast one vote for each of the six candidates."

Judgment was held that Pierce and his five associates were not duly elected; but that the four men receiving 4,557 each were entitled preference to the board of directors of the corporation.

Ruling Law. Story Case Answer

Cumulative voting in corporation affairs is a method unknown to the Common Law, but authorized in a number of states by statute, or in state constitution as in Ohio and Pennsylvania. It is designed to allow the minority of shareholders to obtain representation upon the directorate of the corporation. It may be illustrated as follows: A owns ten shares in a corporation having five directors. Under the Common Law he could vote ten shares for each director or fifty for all of them. The cumulative vote enables him to manipulate these fifty shares very much as he likes. He can vote fifty times for one director or twenty-five times for each of two, or make any other cumulation as he chooses. Since, in the Story Case, the corporation is an Ohio corporation, the cumulative voting of the Weston group was proper, and the three directors elected by those stockholders are legally qualified unless the second contention of the Blair group is an effective one.

Voting Trusts: A voting trust is an agreement between stockholders of a corporation by which the parties thereto surrender their voting power to a committee or other agent called the trustee. Sometimes the agreement is to vote the stock through a trustee in the manner the majority, thereto, shall direct. In some jurisdictions, voting trust agreements are invalid. It is said that the power to vote is inherently annexed to and inseparable from the real ownership of each share, and can only be delegated by proxy with power of revocation. The law has so been enunciated in North Carolina, and in Connecuticut. The Thepang Voting Trust Cases, Volume 60 Connecticut Reports are leading on this point. It has been declared in most states, however, that the voting trust is valid, provided, its purposes are proper and reasonable. In general it may be said that the validity of these agreements depends upon the motives with which they are made. If the attempt is to deal improperly with minority stockholders, or if the purpose is to obtain a monopoly or to create a condition in restraint of trade, then the voting trust is void.

It should be noted that a voting trust implies the surrender of voting power. In the Story Case, the shareholders of the Weston group did not surrender their votes. They were merely requested to vote in a certain manner. This was not a voting trust, and, therefore, the validity of such an agreement need not be tested here. Under the circumstances, the three directors whose seats were contested are qualified to act.