Sunday, August 17, 2014

Cumulative voting is designed to protect minority owners

c) 2001-2014 D.VANITZIAN. All rights reserved. The Associations and Common Interest Living articles and columns may not be reprinted or retransmitted in any form without the express written consent of the copyright holders. The author takes no position regarding any documents or accompaniments that may be enclosed with, attached to, or alongside said article reprints or distribution. Los Angeles Times, Real Estate Section, "Associations Q&A" August 18, 2014 Cumulative voting is designed to protect minority owners By Stephen Donie Vanitzian, Special to The Times 

Cumulative voting is designed to protect minority owners

By Donie Vanitzian

QUESTION: We recently bought a home in a large development with a homeowner association and are new to the concept of boards and this type of living environment. We're told the same directors have been on the board and controlling the association for over 13 years. The directors said their attorney and management company advised them to get rid of cumulative voting. They're campaigning for owners to "support the board" in eliminating cumulative voting. We're uncertain how to vote. What's cumulative voting, and why does the board want to eliminate it?

ANSWER: Ridding the association of cumulative voting has nothing to do with "supporting" the board and everything to do with disenfranchising minority owners under a mask of "fairness."

A caveat to fairness in cumulative voting is that only titleholders should be allowed to vote and no single owner, including the developer, owns the majority of properties. Where the common interest development is not yet completed, the association has a developer-controlled board of directors or the developer owns majority shares or properties, more often than not, those cumulative votes favoring the developer are designed to outweigh and outvote all other voters.

Under Civil Code section 5115(c), if the governing documents provide for cumulative voting, the association shall allow for cumulative voting using the secret ballot procedures provided in Section 5115. An article or bylaw provision authorizing cumulative voting may be repealed or amended only by approval of the owners (defined in Corporations Code section 5034) except that the governing article or bylaw provision may require vote of a greater proportion of owners for its repeal, under Corporations Code section 7615(a).

Cumulative voting allows the titleholder to multiply his votes by the number of directors to be elected. The owner may vote this cumulative total for a single candidate or distribute his votes among any number of candidates (the total number of his votes being equal to the number of shares he is voting multiplied by the number of directors to be elected). In any election of directors by cumulative voting, the candidates receiving the highest number of votes are elected, subject to any lawful provision specifying election by classes, according to Corporations Code section 7615(c).

The purpose of cumulative voting is to ensure minority interest representation on the association's board of directors. While majority board directors may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority, without adequate representation abuse of the process becomes a common occurrence. Any use to which directors put the corporation or their power to control the corporation must benefit all members proportionately. Such conduct is inconsistent with a director's duty of good faith and inherent fairness to minority owners, courts have found.

Titleholders have valuable property rights that vest at the time of their property purchase. Concerned about minority disenfranchisement, courts recognize that although a dollar amount as compensation for such disenfranchisement might be speculative, the "damage is real" and "equity demands that minority members be placed in a position at least as favorable as that which the majority created for themselves."

The destructive consequences of an entrenched board far outweigh the fears that cumulative voting will upset the status quo. Recalcitrant directors intent on remaining on the board begin by amending and rewriting governing documents, inserting terms favoring their reign, eliminating cumulative voting, making decisions outside of meetings and implementing rules with iron fists. However, those actions can have unintended consequences such as reducing individual titleholder wealth through disenfranchisement on the one hand and devaluing property on the other hand. When the minority's vote does not carry the same weight as that of the majority, the minority's worth is lessened.

The purpose of cumulative voting is neutralized when an association (1) staggers terms directors in office can serve; (2) campaigns for or recommends certain candidates, or presents a slate of nominees to be elected together to fill board positions; (3) has annual elections for only one class of directors each year; (4) forces votes by acclamation rather than by nomination that includes proxies and ballots; (5) forces a vote by voice or show of hands; (6) calls for a voice vote of "ayes" and "nos," (7) keeps the same board directors year after year; (8) removes all proxy voting.

Majority directors who get control of the board then do as they please with support from the majority and leave minority owners in the dark, effectively disenfranchising minority voters. The minority then has no one on the board to watch its interests, to protect against waste, extravagance or mismanagement. Couple those actions with a management company vendor that in essence resorts to aiding and abetting the board in order to continue its contract renewals. Through these types of actions, the majority, having obtained absolute control of the association's operations, banking and financial proceeds, along with "unlimited legal paid advice," is free to plunder and abuse its positions of trust with impunity.

The object of cumulative voting is not to tie the board's hands but to protect the minority from disenfranchisement for the want of some representative to look after their interests.





Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.


http://www.latimes.com/business/realestate/la-fi-associations-20140817-story.html

1 comment:

JL "Buzz" Aguirre said...

Coto de Caza's CZ Master Association board of directors has been in power for more than a decade, and instead if using direct elections, it has consolidated its powers by extending the period delegates serve- delegates are the ones who select the directors.