The Cumulative Voting System for the Election of Directors of a Panamanian Corporation

Our lawyers in Panama, experts in Corporate Law, share with us this article on the cumulative voting system for the election of directors of a Panamanian corporation.

Law No. 32 of 1927, on Corporations, legitimizes in its Article 48, the "cumulative voting system”, as it is known in other jurisdictions:

Article 48.

The articles of incorporation may provide that in the election of the members of the Board of Directors the shareholders entitled to vote for Directors shall have a number of votes equal to the number of shares corresponding to them multiplied by the number of Directors to be elected, and that they may cast all their votes in favor of a single candidate, or distribute them among the total number of Directors to be elected or among two or more of them, as they deem convenient.”

The above voting system is a method of selecting directors of a corporation. Its purpose is to provide greater participation to minority shareholders in the conclusion of agreements for the election of directors of the corporation, considering a protectionist tendency of minorities in the above matter. Under this mechanism, minority shareholders can join to add votes in the elections of the members of the Board of Directors and ensure that their interests are adequately represented.

The following is an example to illustrate how the cumulative voting system works:

ABCD S.A. (the "Company”) has 2 vacancies with 2 candidates on the Board of Directors which is comprised of 3 directors. The Company has 80 shareholders, Shareholder A has 10,000 shares, Shareholder B has 10,000 shares, Shareholder C has 1,000 shares, Shareholder D has 6,000 shares and together with the other shareholders -who individually do not have more than 50 shares-, make up the total authorized capital stock represented by 100,000 shares of the Company.

For this election, Shareholder A and Shareholder B have proposed 1 candidate (Candidate A) and Shareholder C and D have proposed a different candidate (Candidate B). The remaining shareholders voted for one or both candidates. At the Meeting, all shareholders decided to exercise their cumulative voting rights.

According to the above example, the number of cumulative votes that each shareholder would have, is as follows:

• Shareholder A: 20,000 votes (10,000 shares owned by the shareholder x 2 directors to be elected).
• Shareholder B: 20,000 votes (10,000 shares owned by the shareholder x 2 directors to be elected)
• Shareholder C: 2,000 votes (1,000 shares owned by the shareholder x 2 directors to be elected)
• Shareholder D: 12,000 votes (6,000 shares owned by the shareholder x 2 directors to be elected).

If the Articles of Incorporation of ABCD S.A. allow cumulative voting, each shareholder may distribute its votes, as it wishes, among the candidates for seats on the Board of Directors, therefore, according to the above example, the result of the voting would be as follows:

• Candidate A: 49,000 votes (20,000 votes from Shareholder A + 20,000 votes from Shareholder B + 9,000 votes from various shareholders).
• Candidate B: 51,000 votes (2,000 votes from Shareholder C + 12,000 votes from Shareholder D + 37,000 votes from various shareholders).

Resulting in the victory of Candidate B in the elections, therefore, the minority shareholders who proposed Candidate B's candidacy will have the required representation on the Company's board of directors.

In the above example, if the remaining shareholders had not exercised cumulative voting, Candidate B would have less chance of winning the nomination.

Contrary to cumulative voting, in "direct voting” (which applies as a general rule, unless the Articles of Incorporation establishes cumulative voting), each shareholder can only vote for one candidate, since each share represents one (1) vote, therefore, the votes of the rest of the shareholders could not have been distributed between Candidates A and B, but would go in favor of only one candidate.

It is important to reiterate that the cumulative voting system can only be applied as long as it is stipulated in the Articles of Incorporation, since the law establishes it.

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