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“Voting rights” generally refers to the right granted to preferred shareholders to participate in voting along-side common shareholders. This is an important power, as the ability to vote on corporate affairs is often a primary characteristic separating preferred and common shareholders. The articles may allow for special voting rights for preferred and common shareholders. This can alter the state law default rule that each class of shareholder approve any major action, such as amendment to the articles of incorporation. Generally, startup certificate of incorporation should provide that the number of authorized common shares may be changed pursuant to a vote of a majority of common and preferred shares. Such a provision can allow for overriding of preferred shareholder descent to corporate actions (such as authorization or issuance of new shares). Further, it may protect investors from a majority of common shareholders taking action without the consent of preferred shareholders (such as authorizing additional shares).
- Note: California corporate law does not allow the articles of incorporation to change the default rule that a majority of common shareholders vote separately to approve the authorization of additional shares of common stock. This provision protects common shareholders against oppression from investors holding a large number of preferred shares. Delaware, however, allows for the voting of all shareholders as a single class to approve certain major corporate decisions, such as authorization of new shares.
Another common voting rights provision allows investors the exclusive right to elect a certain number of directors. This allows for investor control that often exceeds the percentage ownership in the company. Anti-dilution rights will affect voting rights of preferred shareholders, as it alters the conversion ratio for the preferred shares into common stock.
Sample Voting Rights Provision
The Series A Preferred shall vote together with the Common Stock on an as-converted basis, and not as a separate class, except (i) [so long as [insert fixed number, or %, or “any”] shares of Series A Preferred are outstanding,] the Series A Preferred as a class shall be entitled to elect [_______] [(_)] members of the Board (the “Series A Directors”), and (ii) as required by law.