Statutory and Cumulative

Jonathan · August 20, 2020, 3:16pm

I’m a little stuck on a question from one of the exams regarding Cumulative and Statutory voting.

“Your customer owns 200 shares of Emery Co. Stock which is under statutory voting systems. With 7 open board seats, what is the maximum number of votes your customer may apply towards one board seat?”

Answer: 200

Optional Answer: 29 (200/7)

Then I looked at the differences between Cumulative and Statutory.

“ • Statutory: Allows the stockholder to apply only the amount of votes they have to each BOD position being voted on. Statutory voting structures are more beneficial for larger stockholders.

Cumulative: Allows the stockholder to apply the total amount of votes they have to any BOD position being voted on. Cumulative voting structures are more beneficial for small stockholders.

Let’s take a look at a few examples to understand how this concept applies:

An investor owns 100 shares of stock with a statutory voting structure. There are 3 open board positions.

The investor has 300 votes
- 100 shares x 3 open positions
- The investor can only apply up to 100 votes per position

An investor owns 100 shares of stock with a cumulative voting structure. There are 3 open board positions.

The investor has 300 votes
- 100 shares x 3 open positions
- The investor can apply up to 300 votes in any manner

As you can see, a cumulative voting structure allows the investor to apply all of their votes towards one single board position. Assume a stockholder really liked John for a BOD position. They could only apply 100 votes to John with a statutory voting structure, while they could apply 300 votes with a cumulative voting structure.”

It seems like the answer reflects a Cumulative voting system. If it was Statutory, wouldn’t the answer be 29?

Thank you!

brandonrith · August 20, 2020, 6:42pm

Hi @Jonathan - thanks for using our online forum! Let’s re-establish the question you’re focusing on and look at it through the lens of both statutory and cumulative voting structures.

“Your customer owns 200 shares of Emery Co. Stock which is under statutory voting systems. With 7 open board seats, what is the maximum number of votes your customer may apply towards one board seat?”

When a vote occurs, the investor is provided 1 vote for every share owned multiplied by the number of open board seats. Therefore, this investor has 1,400 votes (200 shares x 7 open board seats). The number of votes is the same regardless of statutory or cumulative structure. The difference is how the votes can be applied.

In a statutory voting structure, investors can only apply up to 200 votes per position. To illustrate this, let’s assume there are 10 people running for those 7 open board seats. Let’s say the investor only likes 1 of the 10 people running for those open board seats, and really dislikes the other 9 people. The only thing they could do is apply 200 votes to that one person. Let’s assume the person they like for the position is Person #4:

Person #1: 0 votes
Person #2: 0 votes
Person #3: 0 votes
Person #4: 200 votes
Person #5: 0 votes
Person #6: 0 votes
Person #7: 0 votes
Person #8: 0 votes
Person #9: 0 votes
Person #10: 0 votes

With a statutory voting system, the investor could’ve applied up to 200 votes per position, meaning they can only allocate up to 200 votes per person. One person is only eligible for one position. This situation leaves 1,200 votes unaccounted for, but the investor only likes Person #4 for one of the positions. If they wanted, they could apply up to 200 votes to 6 other persons (adding up to the 1,200 unaccounted votes) running for a board seat.

In a cumulative voting structure, investors can apply up to 1,400 votes in any way. Again, let’s assume the investor only likes Person #4. This is what it would look like:

Person #1: 0 votes
Person #2: 0 votes
Person #3: 0 votes
Person #4: 1,400 votes
Person #5: 0 votes
Person #6: 0 votes
Person #7: 0 votes
Person #8: 0 votes
Person #9: 0 votes
Person #10: 0 votes

As you can see, a cumulative voting structure empowers the small investor and allows them to compile all their votes towards one person.

To summarize the question, here are the two possible answers depending on if it’s a statutory or cumulative voting structure:

Statutory = Up to 200 votes per position
Cumulative = Up to 1,400 votes to be allocated in any way

This is a tricky topic, but I hope this helps! Please respond with any additional questions.

Jonathan · August 24, 2020, 5:29pm

Hi Brandon,

That does make sense. Thank you. Will just need to go over it a few times, but that is clear.

While I have you, I just had a few other questions (I can also post on the community page if you think it helps as others as well!)

In regards to Liquidation priority, one test question says this…

Wages and Taxes

Secured Creditors (Bondholders)

Debentures

Subordinated Debentures

Preferred Stock

Common Stock

But in the reading material it also says this…

Liquidation priority

Unpaid wages
Unpaid taxes
Secured creditors
Unsecured creditors
Junior unsecured creditors
Preferred stockholders
Common stockholders

I understand Debentures are “Unsecured Creditors.” Does this mean that Junior Unsecured Creditors are also “ Subordinated Debentures” ?

My other question is about SIPC insurance. I’m just not connecting with the math on these questions.

Here is the question one of the practice exams:

“Question: In the event of broker-dealers failure, SIPC insurance can be utilized. How much coverage does a customer receive if they have an account with 675,000 of securities and 255,000 of cash?

Answer: 250K in Cash and 250K in securities.”

I understand that SIPC coverage is up to 500K, and no more than 250K towards cash priority first. But why the 250K towards securities? How does it come to that amount?

Thanks!

brandonrith · August 25, 2020, 1:57am

@Jonathan - thanks for reaching out! Yes, junior unsecured creditors are also known as subordinated debentures. Good observation!

For the second question, you’re right about the $500,000 total coverage and the fact that cash is the priority. So, the first $250,000 of coverage is specifically for cash. That’s all the coverage the cash is provided. Now, the remaining $250,000 of coverage is specifically for securities. That’s how you want to approach SIPC questions. Cash is first priority, up to $250,000, then all the rest is securities coverage. To be specific in your example, here’s the final breakdown:

Coverage
$250,000 cash
$250,000 securities

Not covered
$5,000 cash
$425,000 securities

Maybe another example will help even further. Let’s assume this is question:

In the event of broker-dealers failure, SIPC insurance can be utilized. How much coverage does a customer receive if they have an account with $500,000 of securities and $200,000 of cash?

In this scenario, the investor’s breakdown would be:

Covered
$200,000 cash
$300,000 securities

Not covered
$200,000 securities

I hope these examples help! Please respond if you have any additional questions.

Jonathan · August 27, 2020, 2:05am

Hi Brandon,

This does help. I think it’s about recognizing what the question is asking. If provided the amount of cash and securities up front and their looking for the exact figure, then just subtract 250 for cash and subtract additional from securities.

If the question just asks how much coverage is applied to “X” for securities and cash. In that case, it’s just applying 250 to cash and 250 securities as the answer if the question asks “how much coverage does the customer receive.” Does that sound correct?

brandonrith · August 27, 2020, 2:16am

Yes, you’re on the right track. If we wanted to think about it broadly, here’s the rule:

SIPC insurance covers up to $500,000 of account value, but no more than $250,000 in cash*

*Cash is the priority