Common stock makes you a part owner. The base rule for voting rights is one vote per share. You vote for directors and on major changes such as mergers and charter amendments. Shareholders don't vote on dividends; the board decides those.
How directors are elected decides what a minority holder can achieve. Say you own 100 shares and four seats are open. Under either method you control 100 × 4 = 400 votes. The methods differ in where you may cast them.
- Statutory voting: You may cast no more votes per seat than the shares you own, so each candidate gets at most 100 of your votes.
- Cumulative voting: You may split the 400 votes any way you like, all of which may go to one candidate. That concentration helps minority holders win a seat.
Most holders vote by proxy, which authorizes someone else to cast their votes as instructed. Some companies also issue nonvoting stock or dual-class shares, such as a founders' class with ten votes per share.
Common mistakes
- Keeping the plus 1 after the ex-rights date. With the stock at $48, a $40 subscription price and four rights, ($48 − $40) ÷ 5 = $1.60 is wrong; the right is worth $2.
- Ignoring earlier sales under the Rule 144 cap. The cap (the greatest of 1% or the four-week average) covers every sale of the class for the affiliate's account in the past three months, restricted or not, so subtract those sales first.
- Letting a non-affiliate of a reporting issuer sell freely at six months. Until one year, current public information is still required.
Bottom line
- Common stock votes one per share on directors, mergers and charter amendments; cumulative voting (shares times seats, stackable on one candidate) favors minority holders; proxies and nonvoting or dual-class shares are common.
- Preemptive rights let holders buy new shares pro rata below market; a right is worth (M − S) ÷ (N + 1) cum rights and (M − S) ÷ N ex-rights.
- Common holders are paid last in liquidation, behind creditors and preferred, but limited liability caps the loss at the investment.
- Rule 144: hold restricted shares six months (reporting issuer) or one year; affiliates also face the greatest of 1% or four-week average volume per three months, current information, manner of sale and Form 144 above 5,000 shares or $50,000.
Exam shortcut
Find the actor and the date first. An officer, a director or someone who left the role recently is an affiliate. Take the greatest of 1% or average weekly volume, subtract the last three months of sales, then check the Form 144 thresholds. On dividend dates, the ex-date equals the record date, so the buyer must buy by the business day before.
The full lesson (about 3,612 words, 24 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B9
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