In California, Non-Voting Shares Aren't Always What They Seem
Business owners often inquire about establishing voting and non-voting shares. The primary motivation is a desire to limit the number of people who will be able to influence business decisions. But in the case of California corporations, labeling a category of shares as non-voting doesn’t necessarily take away all the holder’s voting rights.
The California Corporations Code allows corporations to issue one or more classes or series of shares with “full, limited or no voting rights.” Based on existing law, holders of non-voting shares are prevented from voting on routine corporate matters, such as the election of directors. However, Section 117 of the Corporations Code provides that:
“Any requirements in this division for a vote of each class of outstanding shares means such a vote regardless of limitations or restrictions upon the voting rights thereof, unless expressly limited to voting shares.”
Accordingly, there are times when a non-voting shares may not be denied the right to vote. For example, Section 903(a), which describes the procedures for amending the articles of incorporation, requires a class vote if the amendment would effect certain specified changes.
It is important for companies to consider the limitations of non-voting shares and recognize that holders of such shares are not necessarily precluded from voting on any and all corporate matters. It may make more sense to go with phantom stock units or similar contractual rights, rather than issuing stock to persons who you don't wish to vote on corporate matters. In addition, the Company's directors and officers will still owe fiduciary duties to non-voting stockholders.