Altering Rules, Cumulative Voting, and Venture Capital

Abstract

California shareholders have long enjoyed the statutory right to elect directors in private companies via cumulative voting. While this rule is often described as mandatory, it is more accurately characterized as a sticky default that is subject to a complex array of altering rules. Many of these altering rules are negative; they forbid the parties from contracting around the cumulative voting rule in particular ways. A few of these altering rules are positive; they tell the parties how to contract around the rule. This symposium contribution provides a detailed account of this legal regime and describes the ways it has influenced corporate practice in Silicon Valley. It then draws upon this account to offer some observations as to the utility — and disutility — of altering rules and cumulative voting more generally.

Keywords: Cumulative voting; altering rules; venture capital; Silicon Valley; California Corporations Code; contractarian; anti-contractarian; mandatory; default; sticky default