COMMENT

Source: Model Act, § 7.21. There are no substantial changes from former law, § 14-2-117.

Subsection (a) provides that each outstanding share, regardless of class, is entitled to one vote per share unless otherwise provided in the articles of incorporation. The word "outstanding" was moved from the first to the second sentence, in the interest of clarity and emphasis. The articles of incorporation may provide for multiple or fractional votes per share, and may provide that some classes of shares are nonvoting on some or all matters, or that some classes have multiple or fractional votes per share while other classes have a single vote per share or different multiple or fractional votes per share, or that some classes constitute one or more separate voting groups and are entitled to vote separately on the matter.

The power to vary or condition voting power is also often used to give increased protection to financial interests in the corporation. It is customary, for example, to make classes of shares with preferential rights nonvoting, but the power to vote may be granted to those classes if distributions are omitted for a specified period. Other conditions may also be created that vary voting rights of holders within a class, such as creation of large blocks, or the duration of the shareholder's ownership.

Under the last sentence of subsection (a), the power to vote cannot be granted generally to nonshareholders. But creditors may in effect be given the power to vote, e.g., by creating a special class of redeemable voting shares for them, by creating a voting trust at the time the credit is extended with power in the creditors to name the voting trustees, by registering the shares in the name of the creditors as pledgees with power to vote, or by granting the creditors a revocable or irrevocable proxy to vote some or all of the outstanding shares.

Subsection (b) prohibits the voting of shares held by a domestic or foreign corporation that is itself a majority-owned subsidiary of the corporation issuing the shares. The Code departs from the Model Act's definition of "majority-owned" as the definition of a subsidiary, and clarifies an ambiguity in former law, § 14-2-117(c), which simply referred to a "subsidiary," leaving open the question of whether minority control disqualified shares. The Code deletes the Model Act's definition, which was based upon ownership of a majority of the shares entitled to vote for directors, and replaces it with ownership of sufficient shares to elect a majority of the directors. Reference to "sufficient shares to elect" recognizes the increasing use of dual classes of common stock with disparate voting rights, as well as the power of preferred shares to vote under some circumstances. The use of the word "sufficient" is intended to eliminate subjective questions of whether a minority has "working control." In this context, "sufficient" means enough votes to elect a majority of the directors even if all other shares are voted against these candidates.

The inclusion of subsection (b) is not intended to affect the possible application of common law principles that may invalidate circular holding situations not within its literal prohibition. As to the possible existence of these common law principles, see, e.g., Cleveland Trust Co. v. Eaton, 11 Ohio Misc. 151, 229 N.E.2d 850 (1967), rev'd on the basis of statutory amendment, 20 Ohio St.2d 129, 256 N.E.2d 198 (1970). The phrase "absent special circumstances" is included to enable a court to permit the voting of shares where it deems that the purpose of the section is not violated.

Subsection (c) makes the prohibition against voting of circularly-owned shares of subsection (b) inapplicable to shares held in a fiduciary capacity. Formerly, § 14-2-117(c) permitted such voting only by a subsidiary that was a state or national bank or trust company authorized to exercise fiduciary powers. Code Section7-1-242 limits the right of corporations to exercise fiduciary powers.

Subsection (d) avoids subjecting a transaction to approval by a class of redeemable shares that will be redeemed as a result of the transaction if adequate provision has been made to ensure that the holders of the redeemable shares will in fact receive the amount payable to them on redemption. This should be distinguished from voting rights that exist when articles of incorporation are amended to redeem shares that were not redeemable by their terms, where voting rights are granted by Section 14-2-1004(a)(10).

Note to 1989 Amendment The 1989 amendment deleted the word "outstanding" from the last sentence of subsection (a) for purposes of clarification. Earlier variations from the Model Act, explained in the second sentence of the second paragraph of the original Comment, were deemed to be confusing. The intent was to emphasize that shares, and only shares, are entitled to vote.

Note to 1997 Amendments Subsection (b) was amended in 1997 to prohibit a corporation from voting its own shares.

Cross-References Acceptance of votes, see § 14-2-724. Articles of incorporation, see § 14-2-202. Cumulative voting, see § 14-2-728. Director establishment of voting rights, see § 14-2-602. "Notice" defined, see § 14-2-141. Proxy voting, see § 14-2-722. Redeemable shares, see § 14-2-601. Redemption of shares, see § 14-2-641. Series of shares, see § 14-2-602. "Share" defined, see § 14-2-140. Shareholders' meetings, see § 14-2-701 et seq. Voting by nominees, see § 14-2-723. Voting by voting groups, see §§ 14-2-140,14-2-725,14-2-726. Voting rights generally, see § 14-2-701.

JUDICIAL DECISIONS

RESEARCH REFERENCES