Voting Rights Archives – Southern California Law Review

Political voting rights have become the subject of sharp legal wrangling in American political elections and the focus of headlines and popular debate. Less attention has focused on American corporate elections, where something similar has been happening: the last two decades have witnessed significant unsettling of basic shareholder voting rights, including laws and practices that were mostly stable throughout the twentieth century. Today, shareholder voting rights are in flux and, increasingly, in controversy. This Article connects the current moment of instability to the last significant era of change in shareholder voting rights—the nineteenth century—and brings historical context to a new era of dynamic change.

A small but potent literature has explored the historical evolution of nineteenth-century shareholder voting rights in corporate law, establishing that per-share vote allocations changed significantly over that century. This literature, which focuses on the shift from “democratic” vote allocations (one-person-one-vote and restricted voting) to “plutocratic” voting (one-share-one-vote), has treated vote allocations as the exclusive determinant of shareholder voting power. The literature has raised as many questions as it has answered, and it ultimately has failed to produce agreement among scholars or a cohesive narrative to explain how or why the modern framework for shareholder voting rights emerged.

This Article presents an alternative account of transformations in shareholder voting rights that tracks three evolving sets of legal rules. It shows how the voting-rights framework that was cemented by the end of the century—the framework that would go on to define twentieth-century corporate control—was determined by the interrelation of the three. One regulated the shareholder’s right to delegate votes (proxy voting), another set per-share vote allocations, and a third addressed the shareholder’s right to cumulate votes (cumulative voting). The Article shows why these three sets of rights must be understood as coactive and interdependent. It contributes new ideas to the longstanding debate about why American corporate law shifted to the rule of one-share-one-vote and concludes by returning to the present moment, arguing that shareholder voting rights have become newly unsettled through shifts along these same fault lines.

INTRODUCTION

Voting rights became the subject of sharp legal wrangling in American political elections when the U.S. Supreme Court decided Bush v. Gore in 2000 and Shelby County v. Holder in 2013.¹ The result has been a resurgence of legal action, academic debate, and media attention focused on Americans’ voting rights. Today, the political franchise is dynamically evolving through legislation and court battles—a process that is commanding headlines and reshaping fundamental relationships of political power in American institutions.

Something similar has been happening to shareholder voting rights in the United States over the same period, though it has garnered much less attention. Shareholder voting laws and practices that were mostly stable throughout the twentieth century, and which capital markets participants took for granted, have become newly contested in the twenty-first century. Many aspects of shareholder voting rights are now in flux, with major debates and regulatory battles playing out over such issues as dual-class structures, ballot access, broker voting, and the universal proxy. The corporate law literature has noted many of these developments—but mostly in isolation and without a broad sweep of perspective.

In particular, over the last two decades, a small literature has emerged at the intersection of corporate law and economic history to examine the history of shareholder voting rights.² Its focus has been narrow. The literature has explored changes to per-share vote allocations over the nineteenth century, noting how the law moved away from restricted voting—which placed limits on the voting power of a corporation’s large shareholders—in favor of one-share-one-vote. This literature uses the term “shareholder voting rights” exclusively to mean per-share vote allocation, and, though it has shed light on some corners of early-nineteenth-century corporate practice, it has raised as many questions as it has answered. To date, there is no consensus among scholars about the purpose served by restricted corporate voting in the nineteenth century, and no consensus about why, by the turn of the twentieth century, it had been replaced by one-share-one-vote.

This Article ties the past to the present day, contributing to the debate over nineteenth-century corporate law history and providing some perspective on current developments. It argues that, in the nineteenth century, shareholder voting rights actually evolved along three parallel tracks. It presents a holistic and ultimately more satisfying account of this history than the literature has previously provided and connects this history of dynamic legal change to the current moment, when, once again, power struggles among the same set of players—corporate managers, large shareholders (now asset managers), and small shareholders—are reshaping shareholder voting rights along these same dimensions.

The first dimension of nineteenth-century legal change involved proxy voting, a system of rules by which a shareholder could delegate his or her vote. Because it expanded the geographic scope of a corporation’s investor base, proxy voting was important for corporate finance in a nationalizing economy. It was also a major, pro-shareholder convenience and held the potential to empower small shareholders through collective action. In practice, however, proxy voting became a mechanism for sidelining shareholders in corporate governance, mainly for the benefit of corporate managers. The group most aggrieved by this sidelining, which was described as “proxy abuse,” was large block holders—wealthy elites—who had the most invested and thus the most to lose if unscrupulous or low-quality management entrenched itself through the proxy system. State corporate laws relating to proxy voting changed considerably over the nineteenth century, moving from a regime in which proxy voting was disfavored to one in which shareholders enjoyed a nearly inviolable right to delegate their votes. Restrictions on proxy voting, enacted by many state legislatures during the nineteenth century to curb proxy abuse, were virtually swept away in the last quarter of the century, creating the modern proxy system.

The second dimension of change involved the allocation of votes per share of stock. In the early nineteenth century, a significant proportion of corporations limited the voting power of large block holders.³ Over time, however, law and practice began to shift in favor of “plutocratic” voting, or one-share-one-vote.⁴ Though this shift likely had several causes, this Article focuses in particular on a cause that has not been recognized in the literature: one-share-one-vote was a way for wealthy investors, particularly at large, widely held companies, to protect against managerial proxy abuse—a significant problem that was just becoming apparent with the expansion of proxy voting. Strengthening the voting power of the largest block holders helped offset managers’ abilities to aggregate and vote the proxies of small shareholders.

The interdependence of proxy voting and vote allocations was self-evident. A shareholder’s theoretical vote allocation mattered little if the shareholder could not cast any vote. Nineteenth-century proxy laws sometimes disenfranchised whole categories of shareholders, such as non-U.S. residents, out-of-state citizens, shareholders behind in their subscription payments, fiduciaries, and shareholders residing a long distance from the meeting place. For a time in Pennsylvania, male shareholders could vote by proxy only if they resided at a distance of ten miles or more from the shareholders’ meeting; the rule was different, and more generous, for female shareholders.⁵ The most significant categorical prohibition restricted officers and directors of a corporation from voting other holders’ shares by proxy, in some cases under threat of criminal penalty.⁶ This prohibition is notable not only because it had significant implications for corporate power at the time, but also because proxy voting by a corporation’s management is, today, the dominant form of corporate voting.⁷

The shift to one-share-one-vote partially tempered problems associated with the emerging proxy system, at least at widely held corporations. However, this shift disempowered small stockholders in relation to wealthy, large holders, catalyzing yet a third counter-balancing trend: the rise of cumulative voting, often as a state constitutional right, starting in the 1870s. Cumulative voting allowed shareholders to aggregate their votes for director candidates, providing a means for small shareholders to gain information and a voice on the board. By 1900, a dozen states had added a right to cumulative voting to their constitutions, while other states mandated cumulative voting through statutory law. However, the most popular states for business incorporations in the twentieth century—Delaware, New Jersey, and New York—never embraced it, preferring an enabling approach that was mostly in place by the turn of that century.⁸

The creation of the proxy system marked a split between corporate and political governance that set the two regimes on diverging regulatory paths.⁹ It invited proxy solicitation, the practice in which savvy actors pursued shareholders to request—or even purchase—their delegated votes. Proxy solicitation would go on to absorb vast corporate resources and become a major focus of regulation. It is, today, the heart of federal regulation of corporate governance. Yet for the better part of two centuries, proxy voting practices sharply limited shareholders’ franchise in one important way: shareholders voting by proxy could not easily choose among competing candidates in a contested election. In the summer of 2021, the U.S. Securities and Exchange Commission (“SEC”) amended its regulations of the proxy system by introducing the “universal proxy,” which places all candidates for election to the board on a single proxy form that resembles a political ballot.¹⁰ Starting in late 2022, companies soliciting proxies were required to present shareholders with the full slate of candidates in contested elections, and, for the first time in American corporate history, shareholders began exercising voting choice that resembles political voting.¹¹

The new universal proxy potentially upends one of the three dimensions of shareholder voting rights: proxy voting. It is one of several ways in which proxy voting has recently been reshaped, including reforms to broker voting rules and, at major asset managers, the emergence of pass-through voting. These changes come on the heels of a recent, significant change to per-share vote allocations: the popularization of dual-class structures, which give extra voting strength to stock held by large, powerful holders. Both the universal proxy and dual-class structures unsettle paradigms that date back to the nineteenth-century history recounted in this Article. Framed in the context of the three-dimensional evolution of shareholder voting rights, these twenty-first-century developments potentially signal a new era of dynamic change to shareholder voting rights—change on a level not seen since the nineteenth century.

Part I describes delegated or “proxy” voting and the rise of the American proxy system. Part II shows how the decreasing use of restricted voting, and the increasing use of one-share-one-vote, were related to the emerging proxy system and, in particular, to problems with that system. Part III introduces cumulative voting and connects its rise in the 1870s to the proxy system and the popularity of one-share-one-vote. It includes a synthesis of the three-track history and the shareholder voting rights framework at the end of the nineteenth century. An epilogue, Part IV, sketches the rising tide of new legal change to shareholder voting rights in the twenty-first century. These changes include the appearance of dual-class structures, the new universal proxy, reforms of broker voting, pass-through voting, and client-directed voting, which in combination recall the nineteenth-century era of voting-rights dynamism.¹²

I. THE SHAREHOLDER’S RIGHT TO DELEGATE THE VOTE

The earliest corporate laws assumed that shareholders would vote in person, gathered together in a meeting hall.¹³ However, in the eighteenth and early nineteenth centuries, at a time when American corporations were mostly formed through special legislative acts, it was common for legislatures to approve charters that authorized shareholders to vote without attending a shareholders’ meeting by delegating their votes to a person who did attend the meeting.¹⁴ This was called voting by proxy, or by attorney. One study of New York corporate charters secured between 1790 and 1825 found that 82% of corporations entitled shareholders to vote by proxy; every bank charter provided this right, while only 21% of the charters for bridge corporations did.¹⁵

Over the nineteenth century, the laws and practices that regulated proxy voting became complex, evolving in ways that shaped the balance of power within corporations. These laws and practices comprised what came to be known as the “proxy system,” establishing the contours of corporate control. Today, the proxy system remains the main instrument—the beating heart—of corporate power. Since the New Deal, for publicly traded companies, it has also been the crux of federal regulation of corporate governance.

During the first half of the nineteenth century, courts of virtually all states agreed that, in the absence of a statute or provision in the legislative charter conferring a right to vote by proxy, shareholders could vote only in person at a shareholders’ meeting.¹⁶ This nearly unanimous approach by the states reflected a preference for shareholder governance that encouraged a democratic-style exchange of ideas among decision makers. In 1834, New Jersey’s Supreme Court put it this way:

It may be for the personal convenience of members, but it cannot be for the good of the corporation, that its business or election should be conducted by proxies. The interest of the company, the good of the public, would be better promoted and more effectually secured by the personal attendance of, and mutual interchange of opinions among the members, than by the action of proxies.¹⁷

In 1856, Pennsylvania’s Supreme Court wrote that, since corporate shareholders were “embarked in a common enterprise,” it was reasonable to require that director elections “take place under circumstances favorable to a consultation with each other, so that [shareholders] might have the benefit of each other’s views and information relative to their common interest.”¹⁸

A. Proxy Solicitation

Early lawmakers probably imagined that shareholders would vote by proxy only when necessary, using care in the selection of a person to exercise their delegated votes. In reality, proxy voting became the dominant mode of corporate voting (and remains so today), and the proxy system produced an elaborate machinery for the solicitation of proxies.¹⁹ Parties soliciting proxies reached out and asked shareholders for their delegated votes—and shareholders handed them over. This led to the development of strategies to cajole proxies from shareholders, ranging from the use of postage-paid mailers, to private investigators, to, eventually, the rise of professional proxy solicitors.²⁰

Two things are noteworthy about the emergence of this solicitation regime. First, actors seeking proxies quickly learned to use lies and misrepresentations to get them. This led to the enactment of laws regulating speech about corporate elections. In the early twentieth century, state lawmakers began enacting statutes that prohibited false or misleading statements in connection with a request for a shareholder’s proxy. This marked a serious point of divergence between political governance and corporate governance in American law. To this day, American law strongly protects false and misleading speech intended to influence political elections,²¹ yet condemns false and misleading speech designed to influence corporate elections.²² During the New Deal of the 1930s, proxy solicitation provided the “hook” for a significant regime of federal speech regulation related to corporate elections, administered by the SEC.

Second, early practices allowed a party soliciting proxies to create the form of proxy (or “proxy card”) used by the shareholder to sign away her vote. Forms sometimes did not specify how a proxy vote would be cast; eventually, a practice developed in which the proxy card listed only the soliciting-proxyholder’s preferred candidates, omitting the names of any other candidates running for election to the board. Shareholders signed the form weeks or even months in advance and may not have known that other candidates were running. They were, in effect, giving up any right to choose among candidates in a contested election. This practice, which was extremely effective at suppressing votes for dissident candidates, became hard-baked into corporate practice and only ceased in late 2022, when a new securities regulation went into effect. Under new SEC rules, parties soliciting proxies (typically the corporation itself) must use a “universal proxy” that lists all candidates for election, giving shareholders a choice—and a proxy form that looks, for the first time, like an electoral ballot. The effect of this change is difficult to predict, but it is already upsetting the balance of power inside firms, as shareholders voting by proxy exercise real choice for the first time.²³

B. Benefits of Proxy Voting

Proxy voting was a major convenience for shareholders at a time when transportation and communication technologies were rudimentary. For many shareholders, especially those of modest means, travel to a shareholders’ meeting was too costly and time-consuming to make the trip worthwhile.²⁴ As the nineteenth century unfolded, large, capital-intensive businesses were increasingly financed by far-flung investors. This was especially true of banks in the early decades of the century. By the 1880s, a significant proportion of railroad stocks, sometimes a majority of a corporation’s stock, was held in Europe.²⁵ The value of proxy voting to foreign investors increased the pressure for legislatures to liberalize proxy voting rights.

Proxy voting could also prevent small shareholders from being disenfranchised altogether by common, practical challenges, such as work responsibilities and even gender-based obligations. Some early corporate laws specified that only women could vote by proxy, for example, recognizing contemporaneous social practices that kept women home-bound.²⁶ New Hampshire enacted a law in 1856 prohibiting railroad proxyholders from exercising more than fifty proxy votes—and then, the following year, amended it to restore the right of proxy voting to “female stockholders.”²⁷ Laws allowing women, but not men, to vote by proxy revealed a desire by legislatures to protect the franchise of small and vulnerable shareholders.

As this suggests, not all shareholders could vote by proxy; some states employed categorical prohibitions that limited the privilege of proxy voting to a select few. For example, in the early 1800s, it was common for proxy voting to be limited to U.S. residents or state residents only.²⁸ In addition, the fiduciary law of many states did not allow guardians, trustees, or executors to delegate votes.²⁹ In these states—under laws that continued well into the twentieth century—fiduciaries could vote in person only, which probably meant that much stock held in the name of fiduciaries was not voted at all. In addition, some states restricted the class of people who could vote as proxyholders to those owning their own stock in the company,³⁰ while other states prohibited shareholders from exercising others’ proxy votes.³¹

As the geography of corporate finance expanded, as shareholding atomized (dividing into small stakes), and as women and workers joined the ranks of shareholders, shareholder attendance at meetings fell. This created a risk that too few shares (or shareholders) would be present at shareholder meetings to satisfy quorum rules, preventing the annual election of directors, which was required under most states’ laws.³² Thus, proxy voting was sometimes presented as essential to basic corporate governance and to the ordinary operation of firms.

In addition to offering convenience in a nationalizing (and globalizing) economy, proxy voting held unique potential as a mechanism for shareholder collective action. At least in theory, proxy voting could have allowed shareholders to act together by giving their proxies to the same person or group, who could vote them all for the same purpose. In practice, however, the collective action benefits for small shareholders never materialized. Instead, a different group of actors learned to use proxy voting to their advantage.

C. Proxy Abuse

Despite its promise for shareholder empowerment, proxy voting swiftly became known as a mechanism for abuse. Over the first half of the nineteenth century, business leaders, especially corporate officers, learned to harvest proxy votes from absent shareholders and vote them to control the outcome of elections for their own, personal benefit.³³

It has been the practice, lately, of some of those interested in carrying any measure in a corporation, to send their agents to the different stockholders to obtain their proxies, so that a contest regarding the policy or propriety of a proposed measure, was not as to what was right or politic, but as to who shall succeed in obtaining the most proxies.

Recent Legislation—New Hampshire, 9 Monthly L. Rep. 326, 328 (1856). The tactics used to solicit, aggregate, and exercise proxy votes in annual corporate elections grew increasingly sophisticated over the nineteenth century. Proxy abuse sparked public outrage but proved challenging for legislatures to discourage through statutory law.

Because shareholders had few informational rights under nineteenth-century corporate law, attendance at the shareholders’ meeting was the main way for shareholders to obtain basic information about the corporation’s financial condition.³⁴ If managers did not provide sufficient information at the meeting, shareholders who were present could ask questions and raise matters for discussion. Of course, shareholders who did not attend the meeting, but instead voted by proxy, could not obtain information about the corporation through this traditional manner. Though proxy voting became increasingly popular over the nineteenth century, laws requiring the provision of information to absent shareholders lagged.³⁵ As a result, during the early decades of the nineteenth century, shareholders who delegated their votes to proxyholders risked being left completely in the dark about the corporation’s operations and prospects.

In 1850, a New York banker described how a corporation’s “reigning directors” could collaborate “to perpetuate their own control.”³⁶ “[S]ome leader among them,” the “emperium in emperio,” would “carefully gather[] up proxies, under the facility of knowing the residence of every stockholder, and being officially in correspondence with him.”³⁷ The banker was pointing out the serious advantages that corporate managers had over ordinary shareholders when it came to proxy solicitation.³⁸ A corporation’s managers had access to the transfer book and the stockholder list and could impede the access of others. They knew who owned how many shares of stock and where the shareholders lived. And because of the nature of the relationship between shareholder and corporation, the management had regular communication with all its shareholders, financed by the corporation itself.

Corporate managers were prominent members of the community, and this gave them an edge in soliciting proxies. “[T]he respectability of the directors and their officers gives them an influence,” one writer asserted, “[and] their particular stations give them opportunities to procure as often as transfers are made at the bank, proxies from the new stockholders to vote in their names at elections.”³⁹ The writer went on,

You my friend know something of human nature, and can judge whether a request for this purpose coming from such a quarter, made with gentleness and affability, but with an apparent expectation that as a matter of course it will be granted.—You can judge whether it is likely in many instances to be refused.⁴⁰

In other words, managers were tempted to exploit their position to obtain proxies, which the author suggested was “an inconvenience inseperable [sic] from the system of voting by proxy.”⁴¹

Evidence suggests that some officers and directors used dishonest tactics to obtain proxies. A Massachusetts author described in his 1863 book, Some of the Usages and Abuses in the Management of Our Manufacturing Corporations, “tricks, subterfuges, and expedients” used by corporate managers to exploit the proxy system.⁴² One practice, he alleged, was for the corporate treasurer’s office to require shareholders to sign their name twice to receive a dividend payment: “one book or paper, which is a receipt, and another, which is a proxy.”⁴³ As he explained, the stockholders often did not understand that they had signed away their votes:

By this process a majority of the proxies of any corporation is easily taken, and kept in possession of the officers to be used by them, or their partizans [sic], at the annual meeting, for their own purposes; which, of course, gives them entire control of the franchise of the Corporation.⁴⁴

Widely held, dispersed stock made a corporation vulnerable to proxy abuse. Corporations with atomized shareholdings were likely to have many small shareholders who failed to vote at all. When many shareholders abstained from voting, the number of proxy votes needed to win an election fell, making it easier to seize control by proxy. If shares were held by speculators, those holders probably had little interest in voting in corporate elections and may have been open to selling their proxies.⁴⁵ Overseas investors often held stock through brokers, who were known to sell proxies. Over time, many kinds of investors—rural, working-class, and overseas investors—probably became habituated to proxy voting, easily signing away their delegated votes.

D. Statutory Limits on Proxy Voting

The earliest restrictions on proxy voting were enacted for banking corporations, which were the most widely held corporations in the early nineteenth century.⁴⁶ Pennsylvania’s legislature passed its first law placing limits on proxy voting at banks in 1812⁴⁷ and enacted a law with more extensive limits on proxy voting, at a broader range of corporations, in 1820.⁴⁸ Special legislative charters for Ohio banks included provisions prohibiting proxy voting by salaried officers as early as 1813.⁴⁹ Ohio was broadly prohibiting proxy voting by salaried bank officers by 1816.⁵⁰ In March 1837, the legislatures of both Virginia and Massachusetts discussed limits on proxy voting at bank corporations;⁵¹ Virginia enacted a prohibition that year,⁵² and Massachusetts did so in 1840.⁵³

In an address in January 1840, Pennsylvania Governor David Rittenhouse Porter called on the state’s legislature to forbid proxy voting in banks altogether—or, if that was “going too far,” at least to prohibit shareholders from giving proxies to a bank’s own officers, directors, or agents.⁵⁴ Proxy voting “prevents those who are interested in banks from investigating their management,” he said, presumably because managers would vote the proxies to defeat any investigation of their own actions.⁵⁵ When Pennsylvania’s House of Representatives debated a banking bill a few years later in 1842, its members argued over whether to eliminate proxy voting at banks only or also at insurance companies.⁵⁶ One legislator announced that proxy voting was “well known” to have given rise to “the grossest abuses,” and another claimed that it had “destroyed the banking system of the country.”⁵⁷

Pennsylvania’s legislature finally ended proxy voting in the state’s banks in April 1843.⁵⁸ Six years later, it issued special limits on proxy voting for manufacturing corporations, too, including a prohibition against any party voting the proxies of more than two absent shareholders.⁵⁹ The same statute limited large shareholders to no more than one-third of the votes, regardless of their shareholding or the size or capital structure of the firm.⁶⁰ In other words, it limited the power of both corporate managers and wealthy block-holders, making small shareholders the beneficiaries of both changes.⁶¹

In New York, in December 1857, a controversy arose about managerial proxy abuse at the New York Central Railroad. Soon thereafter, Horatio J. Stow, a state senator, introduced a bill prohibiting officers of railroad corporations and banking corporations from exercising proxy votes.⁶² Writing anonymously in the New York Times, one New York Central stockholder bemoaned how proxy voting had become “objectionable,” in spite of its convenience.⁶³ “[N]o Board of Directors should exist,” he wrote, “as that one man by proxies, or any other way, should make the Board in fact a board of mere subservients, without paying any decent regard to the feelings and votes of stockholders who are active enough to bestir themselves and offer their own votes personally.”⁶⁴ Despite these concerns, Senator Stow’s bill did not become law, and the managers of New York railroads continued to harvest shareholders’ proxies.

In the 1860s, a shareholders’ meeting of the Albany & Susquehanna Railroad revealed the sort of extraordinary misconduct to which New York’s proxy system was vulnerable. Seeking to control the outcome of the meeting, a shareholder hired a group of New Yorkers to vote as proxies—“a rough, low class of men, such as in common parlance would doubtless be classed among the roughs and fighting men of that city.”⁶⁵ The mastermind of the scheme paid the men to travel by train to Albany, fed them, distributed proxies among them, and brought them to the small meeting room, which they filled to capacity. Other shareholders were either excluded for lack of space or intimidated into silence. A judge concluded that these practices were “a gross perversion and abuse of the right to vote by proxy, and a clear infringement of the rights of the bona fide stockholders of the company.”⁶⁶

In 1864, a group associated with the struggling Chicago & Northwestern Railroad Company harvested proxies for the profitable Galena & Chicago Union Railroad Company—in part by buying proxies from New York “money brokers”⁶⁷—and orchestrated the consolidation of the two railroad corporations, essentially bootstrapping a failing company to a successful one. In litigation that followed, Galena shareholders described an elaborate proxy scheme that took advantage of the fact that few Galena shareholders typically attended shareholders’ meetings.⁶⁸ At the June 1864 meeting in which control of the Galena had been seized via proxy, only about 900 of the corporation’s 60,284 outstanding shares were represented in person.⁶⁹ Shareholders alleged that proxies had been obtained dishonestly.⁷⁰ Instead of invalidating the consolidation, a federal judge ordered the Chicago & Northwestern to pay complaining Galena shareholders more for their stock.⁷¹ However, the high-profile case may have set the stage for Illinois to become,⁷² just a few years later, the first state in the U.S. to adopt corporate cumulative voting to protect the rights of minority stockholders.⁷³

Massachusetts was among the first states to limit the exercise of proxy votes by railroad officers, in 1843.⁷⁴ Its legislature limited railroad directors, treasurers, and other officers to twenty votes when acting as a proxy.⁷⁵ In 1865, Massachusetts expanded these prohibitions in substance and scope.⁷⁶ The new law was not limited to railroads but applied broadly to “any corporation.” It authorized an officer or director to vote no more than twenty shares as a proxy, unless all the shares voted by proxy came from one person. It prohibited a salaried officer from voting as a proxy at all. And it specifically prohibited officers and directors from “ask[ing] for, receiv[ing], procur[ing] to be obtained or us[ing] any proxy vote in the corporation” beyond those limits.⁷⁷ An officer or director who violated the act could be fined up to $500, removed from corporate office, and “forever” disqualified from holding any office in that corporation again.⁷⁸ In the decades that followed, Massachusetts’s legislature affirmed these prohibitions in various acts relating to cemetery corporations,⁷⁹ manufacturing corporations,⁸⁰ street railway corporations,⁸¹ and railroad corporations,⁸² and, in 1870, capped proxy votes exercised by persons other than officers and directors at fifty votes.⁸³

However, a reversal was on the horizon. In early 1888, the president of the Fitchburg Railroad Company, Elijah Brigham Phillips, was caught in an elaborate, illegal scheme to solicit proxies from shareholders and distribute them to paid agents, including fifty “tramps” recruited from a Boston charity, who voted as proxyholders to ensure Phillips’s reelection to the board.⁸⁴ As controversy swirled about Phillips’s upcoming trial, the Massachusetts legislature repealed the fifty-vote cap on proxy votes exercisable by independent proxyholders, signaling their willingness to remake this area of law.⁸⁵

There was little question that Phillips was guilty: at trial, numerous witnesses testified to the secret proxy plot. However, Phillips offered a bold defense. Instead of denying the proxy plot, his lawyers admitted it—and argued that it was “a common practice” among railroads.⁸⁶ Phillips was found guilty of illegally soliciting proxies and faced possible removal from the Fitchburg’s presidency. Instead, the judge deferred his sentence and, in the spring of 1889, the Massachusetts legislature repealed the law that he had been convicted of violating.⁸⁷ After the repeal, the judge dismissed the petition against Phillips, and he suffered no consequences.⁸⁸ The Fitchburg story highlights the significant political power wielded by the state’s large railroad corporations, which they used to legalize voting practices that, just a few decades earlier, had been considered serious infringements on corporate governance.

Pennsylvania’s 1820 law required a person voting another shareholder’s proxy to swear an oath, under penalty of perjury, confirming that he or she had complied with all applicable proxy rules. This created the possibility of criminal liability for proxy violations at private companies, a trend that took hold in other states.⁸⁹ Over the years, several states would authorize criminal punishments for proxy voting violations, even including imprisonment. New York authorized imprisonment for violations of its proxy law for railroad corporations in an 1880 statute; proxyholders could be prosecuted for perjury for giving false oaths, and substantive violations of the proxy law were misdemeanors.⁹⁰ New Hampshire’s 1891 general corporation law went further, authorizing imprisonment and fines, for, among other things, “fraudulently procur[ing] or receiv[ing] the transfer of a share for the purpose of voting thereon,” or “directly or indirectly solicit[ing] a proxy for any other person to vote upon.”⁹¹

E. The Purchase and Sale of Proxies

In the Galena & Chicago Union proxy abuse scandal, described above, proxyholders were reported to have gained control of the railroad by purchasing proxies from New York brokers. This hinted at a wider set of practices that plagued the proxy system.

In the late nineteenth century, many American railroad corporations were financed overseas by investors from Europe.⁹² The logistics of overseas finance encouraged brokers to keep stock registered in the brokers’ own names. For example, when a Wall Street broker purchased stock in an American corporation for sale in Europe, the broker would have the stock transferred into its own name, in case the stock certificates were lost “by an accident to the steamer, miscarriage or robbery of the mails.”⁹³ It was simply easier to have the certificates re-issued if they were registered in the broker’s own name. In addition, because of the snail’s pace of international travel, changes in overseas stock ownership could take “intervals of several months” before stock lists would accurately record the owner of the shares, which presented problems if the new stockholders wanted to vote or receive their dividends.⁹⁴ A broker could collect the dividend and credit it to the client’s account.

All of this tended to encourage practices in which Wall Street brokers held large amounts of clients’ stock in their own name, giving them voting rights in corporations in which they lacked a financial interest. Brokers quickly learned they could monetize this practice by selling proxies for their clients’ stock. In 1878, New York’s Hepburn Committee, formed to investigate abuses by the management of railroad companies, uncovered evidence of proxy abuse, including the purchase and sale of proxies.⁹⁵ A corporate lawyer testified under oath that he had personally purchased proxies from brokers for an election of the Cleveland, Columbus, Cincinnati & Indianapolis Railroad Company.⁹⁶ The practice was not illegal at the time, though the president of the Erie Railroad testified that he found the sale of proxies “extremely objectionable.”⁹⁷ New York’s legislature prohibited the sale of proxies in railroad corporations two years later, in 1880, and, in 1890, at all corporations.⁹⁸

Even where brokers were not selling proxies, they were voting their clients’ stock. A banker for Kuhn, Loeb & Company, admitted to the Hepburn Committee that his brokerage house had voted 56,000 shares of its clients’ stock, which stood in the firm’s name, in the 1877 directors’ election of the Erie Railroad.⁹⁹ The 1880 railroad proxy law included language designed to outlaw this practice as well, but the practice endured.¹⁰⁰ The New York Stock Exchange (“NYSE”) finally stepped in in 1937—nearly sixty years later—to regulate brokers’ voting of client stock, enacting the “ten-day rule.”¹⁰¹

Another way that proxies were monetized was through the “hypothecation” of stock. The president of the Erie Railroad told the Hepburn Committee that it had become common for stock held as collateral to be “transferred upon the books [of the corporation] into the name of the party holding it as security,” giving the creditor the right to vote the stock; the creditor would then sell a proxy for the stock for “a payment of $2 a share, or $1 a share, or $5 a share, according to the emergency of the case.”¹⁰² The shares would be transferred back into the name of the debtor once the debt was paid, per the agreement formed between creditor and debtor. The Erie’s president objected to this transfer of voting control, telling the committee that the practice “ought in some way to be regulated and controlled.”¹⁰³ Here, again, it appears that New York legislators struggled to draft statutory language that could effectively regulate the practice.

F. Proxy Voting as a Shareholder Right

In the last three decades of the century, nearly every state made delegated voting a right of shareholding. Massachusetts was among the states that did so, in an 1870 law (for manufacturing corporations).¹⁰⁴ However, by then it had already placed significant limitations on proxy voting, including a prohibition against proxy solicitation by corporate officers.¹⁰⁵ Massachusetts’s 1870 law left the gist of these proxy restrictions in place.¹⁰⁶ Five years later, in 1875, New Jersey’s legislature used nearly identical language in its own law to entitle stockholders to vote by proxy but omitted the limitations on proxy voting that Massachusetts had embraced.¹⁰⁷ In 1883, when Delaware substantially revised its corporate law, it adopted the language from the New Jersey statute nearly word-for-word, creating an entitlement to proxy voting with no limitations.¹⁰⁸ Thus, by the time of the 1888 Fitchburg Railroad Company election, Massachusetts’s continuing restrictions on proxy voting made it an outlier among Eastern states. This may help explain why Phillips defended himself by claiming that allrailroad managers used the proxy system to control electoral outcomes—and why Massachusetts’s legislature changed its laws when they were challenged.

By 1900, only one or two states still had laws in force that restricted who could vote by proxy, and who could exercise proxy votes. Indeed, the story of how the prosecution of the president of the Fitchburg Railroad for illegally soliciting proxies resulted in the repeal of all of Massachusetts’s proxy-voting restrictions, despite the president’s admitted guilt and the railroad’s poor financial condition, evidences the significant power that corporate managers wielded at the end of the century to end proxy voting restrictions. The widespread (and permanent) elimination of proxy voting restrictions at the end of the century made possible a growing “separation of ownership and control,” as corporate managers became increasingly adept at harvesting and voting shareholders’ proxies.

Only a handful of U.S. states did not place meaningful restrictions on proxy voting at some point in the nineteenth century. Coincidentally, those same states—New Jersey, Delaware, and New York—would play key roles in the “race to the bottom” in the 1880s, 1890s, and early 1900s. Though the conventional story of the “race to the bottom” has ignored proxy voting restrictions, it hardly seems plausible that corporate promoters were not paying close attention to such laws when they sought jurisdictions in which to incorporate large, new companies that would be financed through the sale of stock to the public. What is likely, instead, is that promoters and managers did not publicize their interest in shopping for state laws that gave managers the greatest ability to solicit, aggregate, and vote holders’ proxies, because doing so might have revived public outrage about proxy abuse. Though financial writers continued to wring their hands about proxy abuse in the twentieth century, these concerns did not lead to legislative action until the New Deal.

* * *

By the end of the nineteenth century, proxy voting had become a right of shareholding in virtually every state; a corporation could set ground rules for proxy voting but could not prevent shareholders from delegating their votes. Not only had categorical exceptions been swept away, but courts in several states had started invalidating corporations’ proxy regulations on the ground that they “restricted [the shareholder’s] liberty of choice of the person authorized to vote under his proxy.”¹⁰⁹ In 1888, a New York court threw out a manufacturing company’s bylaw on that basis; it had required a proxyholder to be a shareholder of the company.¹¹⁰ California’s highest court reached a similar decision in 1894 for a bank corporation, asserting that such a bylaw constrained a California stockholder’s “substantial right” to vote by proxy in corporate elections, which was guaranteed by state statutory law.¹¹¹ Though presented as a win for shareholders, of course, this new “liberty” was, in practice, an advantage for corporate managers. It foreclosed shareholders’ ability to contract for proxy voting rules in the charter or bylaws that would have aligned proxyholders’ voting interests with their financial interests, and it allowed virtually anyone to solicit, aggregate, and vote proxies in a corporation in which they held no interest. Some corporations even prevented their own stockholding workers from attending shareholders’ meetings, citing the workers’ power to delegate their votes.

II. PER-SHARE VOTE ALLOCATIONS

Part I showed how the rise of a proxy system of delegated voting shaped shareholders’ voting rights and created opportunities for proxy abuse, leading to a proliferation of state statutes designed to regulate proxy voting and to curb abuses. In spite of tightening laws, proxy abuse quickly became a means for sophisticated actors to control corporate elections, causing harm to shareholders, arousing public anger, and prompting round after round of legal reform.

This Part shifts focus to a separate but contemporaneous change to shareholders’ voting rights: the elimination of restricted voting and the rise of one-share-one-vote in its place. The historical literature has documented how, over the nineteenth century, corporate law evolved significantly with regard to per-share vote allocations. Though the century began with a mix of approaches in use, many of which reduced the voting power of large shareholders, it ended with most states mandating one-share-one-vote, or “plutocratic” voting.¹¹² One-share-one-vote would go on to define twentieth-century voting rights until, very recently, dual-class structures emerged to reintroduce differences in stock voting strength.¹¹³

An enduring puzzle, however, is why state corporate laws moved away from restricted voting in favor of mandatory one-share-one-vote during the nineteenth century.¹¹⁴ The literature has advanced three theories of the purpose of restricted voting: a democracy theory, an investor-protection theory, and a consumer-protection theory.¹¹⁵ Each of these theories implies a different reason for the shift away from restricted voting to one-share-one-vote.

This Part posits that the interplay between proxy voting practices and restricted voting schemes, particularly at widely held firms, heightened problems associated with the emerging proxy system. At widely held corporations, restricted voting schemes made it easier for managers to solicit and aggregate proxies from small holders to control corporate elections. Shareholders who held large blocks of stock might have acted to defeat proxy abuse—and had strong incentives to oppose managerial self-dealing—but they were hobbled by limits on their voting power. In addition, proxy voting could be used to defeat restricted voting: wealthy shareholders could “parcel out” their holdings to affiliates, then obtain and vote proxies for those shares. By breaking up large blocks of stock subject to voting restrictions, wealthy shareholders could increase the voting power of their shares—and unless they were subject to proxy voting restrictions, they could exercise those votes as proxyholders. The expanding use of proxy voting, combined with restricted voting, disempowered large shareholders who acted in good faith (and complied with vote restrictions)—those who might have played a useful stewardship role—but probably did not prevent less scrupulous actors from turning a corporate election to their advantage.

Evidence suggests that some states initially may have responded to rising proxy abuse by experimenting with tighter voting restrictions. When that failed to produce results, legislatures may have become more open to one-share-one-vote as a countervailing strategy—and investors themselves may have demanded it. At the same time, the nationwide trend in favor of cumulative voting, starting in the 1870s, may have encouraged adopting states that had not already done so to mandate one-share-one-vote for all types of corporations.

A. Restricted Voting in Corporate Elections

Though one-share-one-vote is the norm today in American corporate governance, this was not true in the early 1800s. Instead, at that time, a mix of approaches was in use. Some corporations used one-person-one-vote, while others employed graduated voting or voting caps (or both).¹¹⁶ These strategies, which limited the voting strength of large shareholders, constituted restricted voting.¹¹⁷ One-person-one-vote, sometimes described today as “democratic” voting, gave all shareholders equal rights in the management of the corporation, from the holder of a single share to the wealthiest investor.¹¹⁸ For example, when the Wilmington Spring Water Company was incorporated in Delaware in 1804, its legislative charter specified that “no stock-holder shall be entitled to more than one vote.”¹¹⁹

In graduated voting, smaller shareholdings had greater voting power per share, with diminished votes allocated to additional shares.¹²⁰ Graduated voting schemes could have two, three, four, or more tiers of voting strength.¹²¹ As discussed in more detail below, in 1837, Virginia’s legislature created a four-tiered graduated voting scheme for bank corporations. The law gave one vote per share up to ten shares; one vote per five shares, from eleven to one hundred shares; one vote per ten shares, from one hundred one to three hundred shares; and one vote for every twenty-five shares above three hundred shares.¹²² Some corporations used more elaborate sliding-scale approaches, but, whatever the specifics, the effect of graduated voting was to limit the voting power of large block-holders in relation to small holders.¹²³ In fact, the leveling effect was greatest at companies that had a few large holders and many small holders.

Voting caps placed an upper limit on the total number of votes a holder could cast in an election. Some caps set a vote limit,¹²⁴ while others prohibited a holder from exercising more than a certain percentage of the corporation’s total votes. For example, in 1849, Pennsylvania’s legislature enacted a general incorporation act for manufacturing corporations that gave all shareholders one vote per share up to one-third of the total votes.¹²⁵ Other states imposed more restrictive caps. New Hampshire’s 1891 general corporate law statute capped a shareholder’s total votes at one-eighth of the stock.¹²⁶ Massachusetts’s second general incorporation statute for railroads, enacted in 1874, capped shareholders at one-tenth of total shares.¹²⁷ Some states employed graduated voting schemes and voting caps together, the most restrictive approach available.

Restricted voting introduced a confounding problem to corporate governance: unless the entire share distribution of the corporation was analyzed, the relative percentage of votes exercisable by any one shareholder was unknown.¹²⁸ Thus, a shareholder who held twenty-five percent of a corporation’s shares could not necessarily exercise twenty-five percent of votes; that shareholder’s percentage voting power depended on whether (and to what degree) the votes associated with all of the corporation’s other shares were restricted.¹²⁹ In practical terms, restricted voting made it difficult for a party plotting to accumulate proxies to know how many votes were needed to win an election—at least without analyzing the full list of stockholders. This fact helped give the corporation’s managers the upper hand in soliciting proxies. Managers had untrammeled access to the most current list of stockholders, and thus a head start in determining how many votes could be exercised at an upcoming meeting, how many votes constituted a majority, and which shareholders enjoyed the greatest voting power—and therefore should be targeted for a proxy solicitation.¹³⁰ In this way, restricted voting and proxy voting could intersect to give managers, even those owning little stock, a control advantage in the emerging proxy system.

Over the decades, nearly all states moved from mandating restricted voting for at least some kinds of corporations, to mandating one-share-one-vote for all corporations.¹³¹ In a sample of New York corporations incorporated between 1790 and 1825, Eric Hilt found that roughly the same proportion of companies used one-share-one-vote (48%) as used graduated voting and one-person-one-vote schemes combined (47%).¹³² Colleen Dunlavy’s study of special legislative charters from 1825 to 1835 found that 27% used graduated voting.¹³³ Though empirical research on corporate voting rights in this period has produced some conflicting results, all scholars generally agree that graduated voting was in wide use in the early decades of the nineteenth century.¹³⁴

B. Three Theories

Why did states employ restricted voting in corporate elections? The literature has offered three theories about the purpose of restricted voting in early-nineteenth-century corporations. One theory emphasizes political and social factors; the other two focus on economic considerations. Scholars who have contributed to this literature concede that none of the three theories is a perfect fit with the evidence from this period and that empirical studies have produced “contradictory findings.”¹³⁵ The theories are not even necessarily mutually exclusive.¹³⁶ It is possible that restricted voting served a combination of political, social, and economic objectives.

Dunlavy has argued that restricted voting is explained by Americans’ political conception of the business corporation and their post-Revolutionary commitment to democratic governance, which they transmitted to the corporation.¹³⁷ According to this theory, early corporate norms “tended to treat shareholders more like citizens in a relatively egalitarian polity,” following a democratic model.¹³⁸ Advocates of this democracy theory argue that restricted voting suppressed the power that large shareholders exercised in the corporation not only to reduce power inequities among shareholders but also with an eye to the corporation’s growing importance in the community and the economy. The democracy theory suggests that the shift to one-share-one-vote reflected changing political and social conceptions of the corporation and its role in society.

Though Dunlavy makes a persuasive case that early Americans viewed corporate organization through a political lens—and that, following the American Revolution, zeal for democracy was strong—nineteenth-century corporate governance diverged from political governance in some significant ways. The use of different restricted voting schemes for different industries suggests that Americans were not pressing for the same level of democratic voting at all types of corporations.¹³⁹ Importantly, delegated voting was not a democratic norm; proxy voting was rejected for political elections across the United States. Thus, the popularization of proxy voting in corporate elections distinguished corporate governance from democratic political governance, again suggesting that lawmakers and corporate promoters perceived differences between the two. If democratic values shaped early thinking about corporate governance, they appear to have had less salience by the middle of the nineteenth century, when a writer could comfortably assert in the New York Times that “[t]he theory of all corporate bodies is that every member of them should have a vote and an influence equal to his interest.”¹⁴⁰

A second group of scholars, writing mainly from the law-and-economics perspective, contends that restricted voting schemes served an investor-protection purpose by helping small shareholders protect themselves from self-dealing by large holders.¹⁴¹ Because early nineteenth century corporate law offered few shareholder protections, such as informational rights, voting rights may have been particularly important to investors; Eric Hilt has posited that “graduated voting rights were chosen at least in part in order to attract small investors by limiting the voting power of large shareholders.”¹⁴² Hilt’s study of New York corporations chartered through 1825 found that corporations in industries with the greatest ownership concentration were associated with more-restricted voting rules, evidencing a relationship that would support his theory.¹⁴³

The democratic and investor-protection theories offer similar explanations for the purpose of restricted voting. Writings from the middle of the century connected restricted voting to intra-corporate power without specifying whether the power in question was managerial or financial. In 1850, for example, a banker wrote that restricted voting had been employed in New York to “guard against the dangers” posed by a controlling shareholder.¹⁴⁴ A railroad stockholder, writing a few years later, explained that “limit[ing] the number of votes of large stockholders” through graduated voting was “not unusual” and was done “in order to prevent too much concentration of power.”¹⁴⁵ Was the problematic concentration of power strictly a financial problem for investors, or was it also a problem of managerial dominance and political might? Nineteenth-century Americans probably perceived these concerns as overlapping, making it plausible that restricted voting served both political and investor-protection objectives.

The democratic and investor-protection theories imply different reasons for the shift to one-share-one-vote, however. Dunlavy suggests that changing political conceptions of the corporation contributed to the shift to one-share-one-vote. In contrast, the investor-protection theory implies that the need for restricted voting diminished as new investor protections were created. Though investor protections did eventually strengthen in the United States, particularly in the early twentieth century, this timing post-dates the popularization of one-share-one-vote. Research has not yet confirmed that one-share-one-vote grew alongside investor protections during the early or mid-nineteenth century.

Neither the democracy theory nor the investor-protection theory accounts for all of the ways in which nineteenth-century Americans perceived that shareholder voting intersected with corporate power. For example, in 1871, the managers of the Missouri Pacific Railroad pressed the state’s legislature to enact a proposed law authorizing railroad corporations to switch from restricted voting to one-share-one-vote. The editors of the Missouri Republican supported the new law, which allowed a railroad company to eliminate restricted voting upon a shareholder vote.¹⁴⁶ The editors wrote that the original voting scheme for the Pacific Railroad had used graduated voting because “there was fear of the road becoming a political machine in the hands of the city and county of St. Louis,” which once had owned large blocks of stock.¹⁴⁷ After that stock had moved into private hands, the editors reasoned, it “seem[ed] but just” to change the vote allocation.¹⁴⁸ The law was passed.¹⁴⁹ The episode revealed the complexity of considerations that influenced voting-rights schemes at some companies.

Finally, a pair of scholars has advanced a consumer-protection theory.¹⁵⁰ Henry Hansmann and Mariana Pargendler point out that many shareholders of early American corporations were also consumers of the corporations’ products and services.¹⁵¹ They posit that restricted voting empowered consumer-shareholders to use their franchise to prevent large shareholders from raising prices or harming them as consumers.¹⁵² According to these scholars, the consumer-protection theory explains the relative incidence of restricted voting across industries,¹⁵³ particularly what they claim was an earlier shift to one-share-one-vote among manufacturing corporations, as compared to transportation companies.¹⁵⁴ Research for this Article did not find support for such a comparative shift or bright-line distinction across industries, however, as discussed below.¹⁵⁵ The consumer-protection theory suggests that vote allocations changed after “superior substitutes” to restricted voting were developed for the purpose of protecting consumers.¹⁵⁶

All three of these theories were developed in part in reliance on studies of corporate charters from the earliest decades of the nineteenth century.¹⁵⁷ This research has yielded important insights but must be viewed with caution.¹⁵⁸ Study samples have been limited to a small subset of states, like New York, to the exclusion of other states.¹⁵⁹ They have mostly included very early corporations; the most rigorous body of work analyzing voting allocations in corporate charters was limited to the period from 1790 to 1826.¹⁶⁰ Hansmann and Pargendler’s study included legislative charters enacted as late as 1859 but excluded charters obtained under general incorporation statutes, which were common by the 1850s.¹⁶¹ Because the shift to mandatory one-share-one-vote occurred in nearly all states after the Civil War, charter studies have provided, at best, an incomplete picture of changing corporate governance laws and practices.¹⁶²

C. One-Share-One-Vote and General Incorporation Laws

The literature associates the move to one-share-one-vote with the rise of general incorporation statutes in the United States.¹⁶³ This association is explained by researchers’ emphasis on the state of New York, which enacted one of the first general incorporation statutes, for manufacturing corporations, in 1811.¹⁶⁴ New York’s 1811 law mandated one-share-one-vote, a fact that may have led scholars to associate the shift to one-share-one-vote with the rise of general incorporation laws.¹⁶⁵

If we consider states outside New York, a different picture emerges. Ohio enacted a general incorporation law for manufacturing corporations in 1812 that mandated graduated voting.¹⁶⁶ New Jersey’s legislature experimented with one-share-one-vote for manufacturing corporations from 1816¹⁶⁷ to 1819,¹⁶⁸ then repealed one-share-one-vote and allowed corporate promoters to choose a voting rule for themselves.¹⁶⁹ Evidence from Virginia likewise suggests resistance to one-share-one-vote for manufacturing corporations. In 1833, Virginia’s House of Delegates rejected a one-share-one-vote provision in a proposed charter for the Sidney Manufacturing Company, replacing it with a deeply-graduated voting scheme.¹⁷⁰ The four other manufacturing corporations chartered during the same legislative session used graduated or capped voting, suggesting that Virginia’s General Assembly was consistent in requiring restricted voting for manufacturing corporations at this time, even when corporate promoters sought a rule of one-share-one-vote.¹⁷¹ Virginia’s 1837 corporate laws, described in the next section, required graduated voting for manufacturing corporations in the state. Even after the mid-century, West Virginia enacted a general incorporation law that mandated graduated voting for manufacturing firms.¹⁷² Thus, while one-share-one-vote was found with increasing frequency in general incorporation statutes as the nineteenth century wore on, it was not the case that general incorporation statutes ushered in a rule of one-share-one-vote.

D. Virginia’s 1837 Voting-Rights Scheme

Virginia’s legislature responded to surging demand for corporate charters in the 1836–1837 economic boom¹⁷³ by enacting three new sets of corporate laws.¹⁷⁴ These laws regulated vote allocations by industry, mandating graduated voting for (1) bank corporations, (2) railroad corporations, and (3) manufacturing and mining corporations.¹⁷⁵ The statutes were not general incorporation laws, but rather broad “regulatory” statutes that were designed to streamline the special legislative charter process.¹⁷⁶ Because all three laws were enacted by the same legislature during the same year, it seems likely that the use of different vote-allocation schemes was purposeful.¹⁷⁷ Virginia’s legislature assigned the most graduated voting scheme to banks;¹⁷⁸ the bank statute recognized four voting tiers, from one-share-one-vote for small holders (up to ten shares) to twenty-five-shares-one-vote (above three hundred shares).¹⁷⁹ It assigned three tiers of graduated voting to manufacturing and mining corporations¹⁸⁰ and two tiers of graduated voting to railroad corporations.¹⁸¹ However, the railroad voting scheme was still considerably more restrictive for large holders than a two-tiered scheme enacted for turnpike corporations in 1817, which was still in force.¹⁸²

Why did Virginia’s legislature create the most deeply graduated voting scheme for banks? Researchers have found that banks in jurisdictions mandating one-share-one-vote at this time had fewer shareholders, and greater concentration of ownership, than banks operating in jurisdictions with restricted voting.¹⁸³ Thus, one possibility is that legislators believed that enacting a deeply-graduated vote allocation scheme would encourage more Virginians to invest in banks. Legislators may have believed that benefits would accrue to the Virginians who decided to invest, creating widely-shared prosperity, or to the financial system itself, in the form of reduced risk.

Virginia’s 1817 law for turnpike corporations had imposed a less-restrictive voting-rights scheme than any of the 1837 laws. Why would statutes enacted in 1837, twenty years after Virginia’s first turnpike general incorporation laws, impose greaterrestrictions on the voting power of large shareholders than the turnpike law did? (Recall that, under the consumer-protection theory, the voting power of large shareholdings should have been more restricted for turnpike companies than for manufacturing companies, because the former had many consumer-shareholders seeking to keep prices low, while the latter did not.)

Virginia’s legislature may have been more concerned about proxy abuse and electoral fraud in 1837 than it had been in 1817. As we have already seen, in New Jersey, fraudulent corporate elections had become a significant problem by 1825¹⁸⁴ and apparently did not improve after a first round of legislation, resulting in additional legislative action in 1841.¹⁸⁵ In New York, important legislation regulating corporate elections was enacted in 1825¹⁸⁶ and, for “monied corporations,” in 1827.¹⁸⁷ And evidence from Pennsylvania¹⁸⁸ and Massachusetts¹⁸⁹ suggests that serious proxy abuse had emerged at banks in those states by 1840. Problems associated with corporate elections were on the rise during the 1820s and 1830s, a fact that may have prompted Virginia’s General Assembly to experiment with strong new restrictions on the voting power of large shareholders. Indeed, evidence suggests that the use of restricted voting increased in legislative charters from the early 1800s to the 1850s.¹⁹⁰

E. One-Share-One-Vote as a Protection Against Proxy Abuse

If state legislatures believed that tightening limits on the voting power of large shareholders at banks and railroads would curb proxy abuse, however, they were disappointed. Though restricted voting evened the playing field between wealthy elite shareholders and small shareholders, it provided a uniquely potent opening for unscrupulous managers skilled in proxy manipulation. Ambitious actors could solicit proxies from a company’s many absent, small holders to defeat the restricted votes of larger holders.

As we have seen, by the 1840s and 1850s, lawmakers and commentators were complaining of scenarios in which sophisticated corporate managers, owning little stock themselves, had developed strategies to solicit and vote small shareholders’ proxies, establishing de facto control.¹⁹¹ The most aggrieved group in such a scenario—wealthy elites with large ownership interests in a corporation—likely recognized that they would be in a better position to exercise countervailing power in firms if the full voting power of their investments was recognized. Thus, pressure to move to one-share-one-vote may have come from business and political leaders seeking to put an end to proxy abuse.

In addition, proxy voting could be used to defeat restricted voting: wealthy shareholders could “parcel out” their holdings to affiliates, then obtain and vote proxies for those shares. Virginia’s 1837 bank law (but not its laws enacted the same year for railroads and manufacturing and mining companies) prohibited efforts to “evade” graduated voting or to give any party “a greater number of votes than he [was] fairly entitled to under” the act.¹⁹² This suggests a general awareness, by the late 1830s, that large shareholders at banks sometimes took steps to defeat restricted voting. As early as 1818, shareholders of the Bank of the United States had engaged in tactics to evade that bank’s deeply restricted voting scheme.¹⁹³ Though the Bank’s charter capped shareholders at thirty votes, one writer alleged that the Bank’s “southern stockholders” had achieved one vote per share by transferring shares to friends and obtaining proxies for the shares.¹⁹⁴

In later decades, the same tactics would be observed in the railroad industry. The Atlantic & North Carolina Rail Road Company sharply curtailed the voting rights of large shareholders using a graduated voting scheme that was still in place as late as 1921.¹⁹⁵ In the 1870s, however, some large shareholders defeated the restrictions by “parceling out” their stock “by assignment, by gift, and otherwise,” then turned around and obtained proxies for those shares.¹⁹⁶ In 1877, a judge had to step in and enjoin the practice.¹⁹⁷ The persistence of such tactics, across industries, suggests that restricted voting did not always even the playing field between large and small shareholders and that it may have encouraged wealthy actors to defy corporate governance laws.¹⁹⁸

Hilt’s study of early-nineteenth-century New York corporations found a positive association between one-share-one-vote and managerial ownership.¹⁹⁹ Corporations whose directors owned significant stock had higher values on Hilt’s voting rights index, meaning that they were closer to one-share-one-vote. This is consistent with the thesis that one-share-one-vote discouraged proxy abuse. If a corporation’s officers and directors were also its largest shareholders, they did not need to engage in proxy abuse to obtain control. They could exercise control by voting their shares and would likely have preferred a rule of one-share-one-vote. On the other hand, if a corporation’s directors did not own much stock, they could exercise control only through proxy solicitation, and they probably would have preferred restricted voting. Thus, we would expect to find—as Hilt did—that corporations run by managers who owned little stock were more likely to use restricted voting.

The cumulative voting trend, which swept the United States after Illinois first adopted cumulative voting in its 1870 constitution, also pushed states toward one-share-one-vote. This is described in greater detail in Part III.

F. Shareholder Voting Beyond Director Elections

In state laws, corporate charters, and common practice, restricted voting applied to director elections, but not to other matters put to a vote. Shareholders voted on a range of matters and, outside of director elections, a strong default existed in favor of per capita voting.²⁰⁰

[i]f a charter described a voting rule as applying specifically to elections, then all other decisions (e.g., regarding strategy) were to be made according to the common law—one vote per person. . . . [but b]y the turn of the century, charter provisions regarding voting in elections were viewed as applying to all decisions of shareholders.

Id. When shareholders cast votes to decide other matters, “they did so democratically: each shareholder, large and small alike, cast only one vote.”²⁰¹ As a result, it was common for stockholders’ meetings to employ a mix of voting rules: the “stock vote” for director elections and a show of hands, or voting viva voce, for other matters.²⁰²

A Philadelphia lawyer described the default in 1884 as “the majority in number rules at corporation meetings,” unless a special provision of law could be shown that required a stock vote.²⁰³ “[T]he stock vote is never demandable,” he explained, adding that “the charter and by-laws must in each case be examined” to determine which corporate issues had to be determined by a stock vote.²⁰⁴ Large, publicly-held companies in the United States were still reporting voting results on a per capita basis, in addition to a share basis, as late as the 1950s, purely by custom.²⁰⁵ Corporate managers and shareholders alike derived meaning from the per-capita data, which provided a snapshot of shareholder voting from the democratic perspective.

G. The Disappearance of Restricted Voting

The rise of one-share-one-vote advanced “very unevenly” and restricted voting remained common up to and after the Civil War.²⁰⁶ Hansmann and Pargendler found that 42.6% of special legislative charters (across all industries) that were enacted in the 1850s and specified a voting rule employed restricted voting.²⁰⁷ Sixty-eight percent of special legislative charters analyzed by Dunlavy for 1855 used either one-person-one-vote or restricted voting.²⁰⁸ New York used general incorporation statutes to gradually mandate one-share-one-vote.²⁰⁹ However, in 1887, New York’s legislature tried to reverse course, passing a bill that would have allowed corporations to authorize per capita voting in the charter.²¹⁰ New York’s governor did not sign the bill, and it did not become law.²¹¹ New Jersey eventually also moved to one-share-one-vote.²¹² Delaware’s first two general incorporation acts for manufacturing corporations (1875 and 1883) made one-share-one-vote the default, but the state did not mandate one-share-one-vote until 1899.²¹³ For reasons that are unclear, Delaware’s General Assembly changed its law again only two years later to make one-share-one-vote a default rule, rather than a mandatory one, and this remains the rule there today.²¹⁴

In the last three decades of the nineteenth century, vote allocations shifted decisively in favor of one-share-one-vote. Some state legislatures took action to allow existing corporations to change their graduated vote allocations to one-share-one-vote with shareholder approval.²¹⁵ In New Jersey, caselaw at the end of the century suggested that one-share-one-vote might be enforced retroactively against corporations that had been chartered with graduated voting years earlier as a matter of law.²¹⁶

Why did restricted voting disappear from American corporate governance? Hilt noted some of its costs, including “cumbersome and uncertain director elections,” and impacts on the market for corporate control, as well as the fact that shareholders circumvented restricted voting rules.²¹⁷ This Article adds to the possibilities. Restricted voting worsened problems associated with the emerging proxy system; one-share-one-vote provided a means for large shareholders to push back. At a minimum, one-share-one-vote increased the odds that the individuals controlling the company owned significant stock in it. And, as outlined in Part III, the cumulative voting trend, which began in the 1870s to empower minority shareholders in relation to large holders, also pushed corporate governance toward one-share-one-vote.²¹⁸

The solution to the problem of proxy abuse eluded American lawmakers. Corporations in a nationalizing economy needed to raise large amounts of capital, which they did by selling stock to many investors who lived far from the location of the annual shareholders’ meeting. Lawmakers probably did not want to eliminate proxy voting altogether, which risked choking off an important source of corporate finance. On the other hand, state laws designed to regulate proxy voting did not end proxy abuse. At the middle of the century, one writer suggested that states had abandoned restricted voting “from an opinion that every guard can be easily evaded, and that stockholders had better be presented with a known evil, than deluded with a fallacious remedy.”²¹⁹

* * *

Restricted voting faded away in the second half of the nineteenth century.²²⁰ Dunlavy placed the shift “from democratic to plutocratic voting rights” in the period that followed the Civil War—the decade or so that also witnessed the invention of cumulative voting.²²¹ By the end of the nineteenth century, most states required one-share-one-vote for newly chartered corporations.²²² However, many corporations that had been chartered decades earlier, under different legal regimes, continued to employ graduated or capped voting into the twentieth century. Thus, vestiges of restricted voting likely influenced shareholders’ rights and corporate control as late as the 1920s or beyond.

III. THE SHAREHOLDER’S RIGHT TO CUMULATE VOTES

Part I described the evolution of the shareholder’s right to vote by proxy and the development of the American proxy system. Part II connected that development to legal changes regarding per-share vote allocations. Together, these parallel tracks of change produced a system in which shareholders were entitled to delegate their votes, and voting power grew in direct proportion to investment. Proxy voting and one-share-one-vote developed synergistically: the former opened a gap between ownership and control, creating opportunities for expropriation and self-dealing, while the latter partly rebalanced power by empowering large shareholders to stand up to grasping corporate “kings”—the managers who might otherwise solicit, aggregate, and vote proxies, wielding unaccountable power over commercial empires.²²³

This Part shifts focus to the third major dimension of shareholder voting power—one that did not take shape until the last decades of the nineteenth century. This was cumulative voting: the shareholder’s right to aggregate votes across open seats in a director election. The invention of cumulative voting—and its instant popularization across American states—responded to a shifting balance of intra-corporate power, which had emerged to favor corporate managers and large block-holders at the expense of small shareholders. Essentially, the shift to one-share-one-vote, which gained momentum after the Civil War, was disempowering small shareholders in relation to wealthy, large holders, upsetting the balance of power that had been struck, however temporarily, at the beginning of the century. One-share-one-vote reintroduced the problem that restricted voting had sought to solve—the large holdings of wealthy investors translated directly into outsized voting power, relegating small shareholders to the margin of corporate governance.

Cumulative voting arose as a right of shareholding, starting in the 1870s, in counterbalance to that trend. Sometimes called “minority representation” by contemporaneous writers, cumulative voting provided a means for small shareholders to pool their votes to gain representation on the board. By 1900, nearly half of states had created a right to cumulative voting in corporate elections, reflecting significant political support for minority representation in American corporate governance and evidencing the hydraulic nature of intra-corporate power dynamics.²²⁴ Yet, cumulative voting faced strong resistance from corporate managers and was largely defeated by obstructive tactics, litigation, and the rise of the classified board. In the 1920s, Harvard economist William Z. Ripley observed that cumulative voting had been “repeatedly attacked, whittled down, actively debated, over and over again” since the late nineteenth century.²²⁵

A significant literature has described the rise and fall of cumulative voting in American corporate governance.²²⁶ This Part summarizes that history, presents cumulative voting as one of the three dimensions of nineteenth-century shareholder voting rights, and shows how it related both to delegated corporate voting and to the shift to one-share-one-vote.

A. The Invention of Cumulative Voting

New York, a leading state in the trend to mandate one-share-one-vote, was the first state to consider cumulative voting. A delegate to the 1867 New York constitutional convention proposed corporate cumulative voting during a period of significant proxy abuse in the state.²²⁷ The proposal was voted down after a debate.²²⁸ New York would never mandate cumulative voting but did pass a statute allowing corporations to opt in to cumulative voting in 1892.²²⁹

Two years after New York’s failed attempt to introduce corporate cumulative voting, the Chicago Tribune advocated cumulative voting as a cure for “many of the evils, mismanagements, and corruption of our private corporations” in advance of Illinois’s upcoming constitutional convention.²³⁰ Cumulative voting was proposed at the Illinois constitutional convention for both political and corporate elections.²³¹ “Give all the share-holders the right to plump their votes,” the Tribune argued.²³² Illinois’s constitutional convention went on to adopt cumulative voting for corporate elections, making it the first state to do so.²³³ The convention delegate who proposed it, Joseph Medill, was an owner of the Chicago Tribune and would become, the following year, Chicago’s mayor. Medill championed John Stuart Mill’s ideas about minority representation in democracy, which Mill had published in an 1861 work, and he also connected cumulative voting directly to proxy abuse.²³⁴ In a speech at the convention, Medill said,

The men who get control of stock by proxies, which they coax or purchase on misrepresentation, elect the entire board and then do as they please. The remainder of the stockholders are in the dark. . . . This majority having obtained absolute control of the offices of the company proceed to plunder the stockholders by high salaries, multiplication of offices, speculating in its money and franchises, and abusing their trusts in every respect. That this practice is common, is notorious throughout the Union as well as within this State, and it is growing worse all the time. This provision will unquestionably afford every stockholder more power of self-protection than he now possesses.²³⁵

Medill’s words reveal how, at its origin, cumulative voting was presented as a solution to problems that arose from the proxy system—problems that appear to have hit a new high point by 1870.²³⁶

Cumulative voting did not, of course, take off in American political law.²³⁷ But it quickly soared to popularity in corporate law—and, in a number of states, was constitutionalized as a right. Illinois’s 1870 constitution stated that “every stockholder shall have the right to vote, in person or by proxy,” cumulatively, “and such directors or managers shall not be elected in any other manner.”²³⁸ Within ten years of Illinois’s invention of corporate cumulative voting, five states had added corporate cumulative voting to their constitutions;²³⁹ seven more added it to their state constitutions by the century’s end.²⁴⁰ Colorado, Michigan, and Ohio²⁴¹ made cumulative voting mandatory by statute rather than in their state constitutions over the same period.²⁴² Texas enacted a statute making cumulative voting mandatory for railroad corporations in 1876.²⁴³

Charles M. Williams reviewed the debates that led to the adoption of cumulative voting in states across the U.S. and identified the main arguments offered in its support.²⁴⁴ The most prominent of these was an informational argument. Advocates argued that cumulative voting would enhance the information flowing to minority shareholders about the corporation’s affairs. Proponents of cumulative voting also argued that it would give a voice to minority shareholders in decision making, extend ownership participation to the corporation akin to that found in the partnership, and contribute to the “public welfare.”²⁴⁵ When Pennsylvania’s Supreme Court was called to interpret the state’s new constitutional provision on cumulative voting in 1876, it wrote that the legislature’s intent “was to work a radical change in the method of conducting corporate elections.”²⁴⁶ Leading corporate law experts, such as William W. Cook, argued in favor of cumulative voting to strengthen shareholders’ power at the end of the century.²⁴⁷ In 1927, economist William Z. Ripley acknowledged its “validity for the purpose of tempering unduly autocratic management.”²⁴⁸

Of the nineteen states that adopted a right to cumulative voting in corporate elections between 1870–1900, several—including Pennsylvania and West Virginia—moved to mandatory one-share-one-vote and cumulative voting at the same moment.²⁴⁹ For example, prior to adopting cumulative voting, West Virginia had mandated graduated voting for most types of corporations.²⁵⁰ Under its first general incorporation statute, enacted in 1863, shareholders were entitled to one-vote-per-share up to one hundred shares, but only one vote for every four shares over one hundred shares.²⁵¹ When, nine years later, in 1872, West Virginia amended its constitution to create a right to cumulative voting, it simultaneously mandated one-vote-per-share and eliminated graduated voting.²⁵²

It made sense to do this. First, cumulative voting was presented as increasing the voice of minority shareholders in firms with concentrated ownership—a main purpose of restricted voting. Thus, some state legislatures may have understood cumulative voting as an alternative to restricted voting. In addition, cumulative voting added to the complexity of director elections but its procedures were streamlined by moving to one-share-one-vote. West Virginia’s provision gave shareholders the right to “give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them on the same principle among as many candidates as he shall think fit.”²⁵³ The provision would have needed different, more complex wording if cumulative voting was to be paired with graduated voting. In other words, cumulative voting may have seemed more workable if every share of stock was accorded the same voting power.

B. Cumulative Voting Meets Resistance

Corporate managers resisted cumulative voting in a national trend that underscored their fear about the potential for cumulative voting to shift power to minority shareholders. Corporations tried creative strategies, reflecting the growth, by that time, of a sophisticated bar of corporate lawyers. In 1885, the management of the Central California Water Company tried to defeat cumulative voting by electing directors one at a time, rather than together as a group; a California court rejected this as violating the state’s constitutional provision.²⁵⁴ By 1900, a case about Michigan’s cumulative voting statutes had reached the U.S. Supreme Court. In Looker v. Maynard, the Supreme Court held that Michigan’s 1885 cumulative voting statute made cumulative voting mandatory for an insurance company that had been incorporated in 1869 under a different version of the state’s corporate law.²⁵⁵

The robustness of the right conferred by cumulative voting laws turned, in part, on the size of the board itself and whether it was classified.²⁵⁶ As a result, state laws setting the size of the board and authorizing (and placing limits on) board classification shaped the rights that shareholders enjoyed in states where cumulative voting was mandatory. To the extent that a state’s constitution made cumulative voting an individual right, statutory laws about board size and classification operated to limit those rights and, eventually, were challenged in court as violating state constitutions.²⁵⁷ In the middle of the twentieth century, a shareholder of an Illinois corporation succeeded on a claim that a state law authorizing a staggered board conflicted with his state constitutional right to cumulative voting.²⁵⁸ This was followed by a second case, in Pennsylvania, in which several large corporations filed amicus briefs to preserve the use of classified boards.²⁵⁹ The Pennsylvania Supreme Court sided with the companies and held that classified boards were permissible despite the state-law right to cumulate votes.

Delaware, New York, and New Jersey—the three states that would dominate twentieth-century corporate law—declined to adopt mandatory cumulative voting. Instead, all three eventually allowed companies to opt in to cumulative voting. New York led the pack by enacting a statute in 1892 that permitted cumulative voting.²⁶⁰ New Jersey adopted the same approach in 1900,²⁶¹ and Delaware did so in 1917.²⁶² One study found that, by 1937, 45% of corporations registered with the SEC were incorporated in these “permissive” states.²⁶³ By 1956, the permissive states claimed a majority of companies listed on the NYSE.²⁶⁴

C. A Century of Relative Stability

The nineteenth century gave way to a new century in which shareholder voting rights stabilized. Twentieth-century corporate managers continued to enjoy significant advantages in proxy solicitation and voting, which they refined and enhanced. Starting in the New Deal, federal regulation of the proxy system gradually increased requirements for parties soliciting proxies to disclose accurate, material information to the shareholders whose delegated votes they sought. But it did not fundamentally change the proxy system or rebalance power within it. For the most part, the American proxy system continued to exist, largely in the form that it had achieved by the end of the nineteenth century, for another hundred years.

One-share-one-vote remained the dominant—even exclusive—approach to vote allocations in the United States until the very end of the twentieth century. In 1926, the NYSE expressly outlawed dual-class structures in corporations listed on its exchange; the prohibition endured until the 1990s when the major stock exchanges began allowing corporations to go public with dual-class structures.²⁶⁵

Cumulative voting, which had exploded in popularity at the end of the nineteenth century, had also been hobbled by countermeasures, such as the classified board, employed widely by corporate managers. Still, cumulative voting laws remained politically popular. Jeffrey Gordon noted a “high water mark” for mandatory cumulative voting laws in the late 1940s.²⁶⁶ Thereafter, corporate managers began a largely successful campaign to end cumulative voting rights.²⁶⁷

The seven states that adopted cumulative voting in this period all chose the permissive form. In the 1960s and early 1970s the trend was even more pronounced: states began switching wholesale from mandatory to permissive. The 1980s were a rout. Twelve states switched from mandatory to permissive. By 1992, only six states maintained mandatory cumulative voting; forty-four jurisdictions (including the District of Columbia) chose the permissive form; one state (Massachusetts) did not permit cumulative voting. No important corporate law jurisdiction maintained mandatory cumulative voting.

Id. at 145–46. The timing of those efforts coincided with a surge of shareholder activism seeking to strengthen cumulative voting—a central plank of the “corporate democracy” movement. Cumulative voting was also championed by shareholder activists who fought to add women to corporate boards, a campaign that gained significant public attention in the late 1940s and early 1950s.²⁶⁸ In 1943, the first woman shareholder to successfully present a shareholder proposal under the SEC’s new Shareholder Proposal Rule submitted a proposal that, among other things, demanded cumulative voting.²⁶⁹

Over the 1950s and subsequent decades, shareholder activists lost the company-by-company battle for cumulative voting, and it became increasingly uncommon. Today, only six states entitle shareholders to use cumulative voting in director elections, and cumulative voting is rarely utilized by shareholders.²⁷⁰ Unlike proxy voting, which empowered corporate managers, and one-share-one-vote, which empowered large shareholders, cumulative voting—which was designed from the start to empower small shareholders—never fulfilled its promise.²⁷¹

IV. EPILOGUE: A NEW ERA OF DYNAMIC CHANGE

After the turn of the twenty-first century, shareholder voting rights entered a new era of accelerating change. In 2008, Marcel Kahan and Edward Rock proclaimed that voting had never been more important in corporate law.²⁷² Yet, at that moment, corporate law was still years away from important upheavals in broker voting, pass-through voting, client-directed voting, and proxy voting mechanics. Delaware’s legislature authorized corporations to hold virtual-only shareholder meetings in 2000,²⁷³ but it wasn’t until the COVID-19 pandemic of 2020–2022 that tech-enabled, virtual meetings became dominant, accelerating the pace of technological advancement for shareholder voting.²⁷⁴

This Part summarizes evidence that the United States has entered a new era of change in shareholder voting rights, recalling the strenuous change that characterized the end of the nineteenth century, when accelerating forces pulled shareholder voting rights in competing directions. Current developments invite a comparison between shareholder voting rights in the Gilded Age of the late nineteenth-century and the so-called New Gilded Age of the twenty-first.²⁷⁵

The First Gilded Age was the era of industrial capitalism that began in the 1870s and 1880s and continued through the first years of the twentieth century, leading to the Progressive Era. . . . The Second Gilded Age begins, more or less, with the beginning of the digital revolution in the 1980s, but it really takes off in the early years of the commercial Internet in the 1990s, and it continues to the present day.

See also, Kent Greenfield, Reclaiming Corporate Law in a New Gilded Age, 2 Harv. L. & Pl’y Rev. 1, 3–4 (2008) (describing factors contributing to a new Gilded Age). During both periods, shifts in the balance of power among three core corporate constituencies—corporate managers, large shareholders (now asset managers), and small shareholders—put pressure on shareholder voting rights law. This building pressure coincided with major fault-line shifts in shareholder voting rights, as the “tectonic plates” of shareholder voting—proxy voting rights, vote allocations, and cumulative voting rights—moved in relation to each other. In the present moment, technology is transforming shareholder voting. Advancements in technology, especially those relating to the dissemination of information and voting mechanics, are making possible changes that could not have occurred in the nineteenth century.

A. The Re-Concentration of Voting Power in the Big Three

The re-concentration of shareholding into a very small set of private actors is the headline story of twenty-first-century corporate organization. It has reversed more than a century of increasingly dispersed shareholding—what once was called the “democratization” of shareholding²⁷⁶—by channeling voting power away from retail investors into institutional investors. At first, this power was exercised by a varied group that included mutual funds, pension funds, insurance companies, and banks, among others. More recently, that power has continued to re-concentrate into a very small set of actors, especially the “Big Three” asset managers: BlackRock, State Street, and Vanguard.²⁷⁷

Because the Big Three have the voting power to drive corporate policy, and have shown an increasing willingness to intervene in corporate policy, this re-concentration has upset the balance of power between shareholders and managers; corporate managers can no longer rest assured that they control voting outcomes through proxy voting. (Indeed, in a twist of irony, retail shareholders have emerged as a more consistent source of voting support of management than institutional investors.)²⁷⁸ The power of the Big Three is potentially kept in check only by state regulation and by their fiduciary obligations to beneficial holders. Corporate law and finance academics continue to assess this re-concentration, especially in light of the Big Three’s new willingness to exercise power and push for corporate reforms.²⁷⁹

B. A Countervailing Trend: Dual-Class Structures

Dual-class corporate structures allocate different levels of voting strength to different classes of stock. Dual-class structures began appearing in the 1980s, ending almost a century of adherence to the rule of one-share-one-vote.²⁸⁰ Google’s adoption of a dual-class structure in 2004 popularized the approach, and it has been used with increasing frequency in prominent Silicon Valley firms to cement insider control.²⁸¹ In 2021, twenty-three percent of all initial public offerings in the U.S. utilized a dual-class structure.²⁸² The swift rise of dual-class structures has attracted academic interest, producing a growing literature on the subject, especially since 2017.²⁸³

The modern trend does more than merely return shareholder voting to the nineteenth-century model, in which different shares of stock carry different vote allocations. It reverses the restricted voting paradigm of the nineteenth century. In the nineteenth century, restricted voting diminished the voting strength of shares held by large stockholders, creating what some commentators described as a more democratic (or equal) voting power between middle-income investors and wealthy elites. As we saw in Part I, however, restricted voting also functioned to empower corporate managers because it made it easier for them to seize control by proxy. Though the popularity of restricted voting early in the nineteenth century may have reflected a democratic impulse (this is up for debate), it did not produce more democratic governance of corporations.

Today, dual-class structures enhance the voting strength of elite shares—and, this time, those shares are most likely to be held by management itself, often a company founder.²⁸⁴ Commentators have argued that dual-class strategies are a direct response to the twenty-first-century empowerment of institutional investors.²⁸⁵ As institutional investors’ power has increased, corporate managers at some companies have responded by using per-share vote allocations to rebalance power in their favor.

Modern dual-class structures empower corporate managers by comparatively diminishing the voting rights of other shareholders. That dual-class structures are common in the tech industry, where behemoths like Alphabet and Facebook, or Meta, exercise near-sovereignty over key, communicative aspects of Americans’ lives, only underscores how this voting-rights reform reverberates across corporate policies. Although shareholder advocates largely oppose dual-class structures, there is no sign that dual-class structures are going away, or even that limits on dual-class structures (such as sunset provisions), which are popular with academics and practitioners, will be mandated by law. The struggle between concentrating shareholder voting power on one side (asset manager capitalism) and concentrating management voting power on the other (dual-class stock) has yet to play out.

C. Changes in Favor of Beneficial Holders

The re-concentration of ownership in asset managers has been met not only with push-back from corporate managers but also with new demands from small shareholders. As a result of decades of change that began around the middle of the twentieth century, Americans mostly hold public-company stock through intermediaries, such as funds and brokers.²⁸⁶ Though this
re-concentration has empowered asset managers, it also has sparked demands that asset managers provide greater transparency, accountability, and control over voting to beneficial holders—the clients for whose benefit the asset managers invest.²⁸⁷ Internet technology has played a key role by providing a means for investors to learn more about their funds’ voting practices.²⁸⁸

The first steps occurred in 2003. That year, new SEC rules went into effect requiring mutual funds to make public their policies on proxy voting and to disclose information about the votes they cast.²⁸⁹ These rules were designed to provide investors with tools to choose funds whose proxy voting aligned with investors’ own preferences. At the same time, the NYSE restricted uninstructed broker voting on executive compensation—the first of several moves to limit broker voting of client stock.²⁹⁰ In 2006, an NYSE working group recommended that brokers be prohibited from voting uninstructed stock in uncontested director elections.²⁹¹ This change did not go into effect until 2010.²⁹² Two years later, in 2012, the NYSE further expanded “Broker May Not Vote” matters to include proposals to declassify the board and to eliminate a supermajority voting requirement, among other matters.²⁹³

The crux of all these changes has been to make both funds and brokers accountable to their clients when they vote their clients’ stock—a relatively uncontroversial move that reduces agency costs while also protecting the interest of beneficial holders in determining how stock held for their benefit is voted. Yet the implication of these changes for the exercise of power in firms is substantial. These changes shift power from holders of record (asset managers and brokers) to beneficial holders, a group that includes public pension funds and retail shareholders. After many decades in which the voting power of intermediaries grew at the expense of small holders, these recent changes present a countervailing shift of power in favor of smaller holders.

D. Pass-Through & Client-Directed Voting

Another significant trend has been the rise of pass-through and “client-directed” voting strategies, especially through the use of new technologies. In 2021, one of the largest asset managers, BlackRock, announced new pass-through voting for index fund clients. Under this policy, the votes for about forty percent of indexed equities will be directed by clients of the asset manager.²⁹⁴ This change restores to pension funds, who invest in indexed products, something close to direct voting rights. It reflects both client demand for direct voting and a willingness of asset managers to relinquish voting power over shares under their control. Since it is adopted as a matter of practice, and is not required by law or regulation, the asset manager controls how voting control is allocated—for example, there is nothing stopping asset managers from allocating all of a fund’s votes based upon the preferences of a majority of clients.

Client-directed voting is a term coined in 2006 to describe advance voting instructions—a mechanism in which clients instruct the voting of their shares in advance, using specified criteria.²⁹⁵ This “set it and forget it” approach could vest significant power in the intermediary if the intermediary determines which advanced instructions its clients will choose among. Various market participants have endorsed the idea of client-directed voting, but the SEC has yet to enact rules that would make its implementation possible.

Both pass-through and client-directed voting respond to rising interest among investors, including retail shareholders, in direct-voting strategies.²⁹⁶ Put simply, investors want the benefits of index investing and brokerage accounts, combined with the benefits of voting choice.

E. The Universal Proxy

Even more recently, reform of the proxy system has occurred at the federal level. While the proxy system was relatively stable over the twentieth century, one problem remained constant: shareholders who signed away their votes did so using proxy cards that limited their choice of candidates.²⁹⁷ For all of the twentieth century, and almost a quarter of the twenty-first, shareholders generally could not vote by proxy without accepting limits on their freedom of choice.²⁹⁸

a shareholder who does not attend the stockholder meeting is unable to vote for some of management’s nominees and the nominees of the dissidents on the dissidents’ proxy. This is because, under corporate law, if a shareholder submits two different proxies the most recently executed proxy is counted on the theory it revokes the earlier proxy.

Id. In the 1990s, shareholders began withholding votes for candidates on the slate provided on the proxy form, to “express their lack of confidence in management’s performance.” See Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 Stan. L. Rev. 857, 865 (1993). This practice only underscored the shareholder’s lack of real choice when voting by proxy in a contested election.

Director elections held after August 31, 2022, are subject to new SEC rules that introduce the universal proxy.²⁹⁹ The universal proxy allows shareholders who vote by proxy to “mix and match” votes among candidates from different slates, the way that American voters can choose among candidates from different political parties in political elections.³⁰⁰ Though sometimes described as a “universal proxy ballot,” a universal proxy is not a ballot in the conventional sense.³⁰¹ A proxy card is a form delegating the shareholder’s vote—and a universal proxy simply offers the shareholder a greater range of choice for instructing the proxyholder about how to exercise the delegated vote. American shareholders may perceive the universal proxy as a ballot because it will resemble an absentee or mail-in ballot of the sort used in political elections. The universal proxy brings shareholder voting close to the political model. It may affect electoral outcomes, in particular by making it easier for dissident candidates (those not on the management slate) to get elected.³⁰²

* * *

The new developments described in this Part represent potentially significant changes to two of the three dimensions of shareholder voting rights explored in this Article (proxy voting and vote allocations). The history shows that the dimensions of nineteenth-century shareholder voting rights functioned interdependently; changes along one track influenced other, parallel tracks, in a process that shifted voting power back-and-forth among three core constituencies: corporate managers, small shareholders, and large shareholders. Though these tracks were governed by state law during the nineteenth century, they are significantly in the domain of federal law (or national stock exchanges) today.

With change occurring along three dimensions, shareholder voting rights in the nineteenth century were relatively fluid—and they proved difficult for legislatures to regulate effectively. The result was a long period of state-by-state experimentation, with significant variation. By the end of that century, however, state experimentation was coalescing into the now-familiar “race to the bottom.” Corporate managers had reshaped the law governing shareholder voting rights in ways that struck the balance of power in their own favor. This generated political resistance that would endure for decades. It set the stage for the tremendous industrial growth of the twentieth century, but it also assured that small shareholders would play little meaningful role in the governance of the companies in which they invested.

Several lessons emerge from this history. First, the primary conflict in corporate law is not binary but tripartite, among small shareholders, large shareholders (now asset managers), and corporate managers. Second, the wins and losses in this conflict can be difficult to discern except in hindsight. However, there can be little question that corporate power is distilled through changes to shareholder voting rights—and that changes in one area of shareholder voting increases or relieves pressure on other areas. Corporate power is hydraulic. Finally, when the dust settles, one set of actors may hold legal advantages that persist for decades. At the end of the nineteenth century, corporate managers emerged victorious and exercised de facto voting control over most big corporations for much of the twentieth century. Today, large asset managers are challenging corporate managers for power, with technologically-enabled small shareholders demanding greater voice. Whether corporate managers will again emerge as winners remains to be determined.

CONCLUSION

This Article has presented nineteenth-century shareholder voting rights in a new light, expanding the conventional account from one dimension of legal change to three. This new account is not merely academic—it helps us understand present-day currents that are shaping corporate law.

By the nineteenth century’s end, an evolving paradigm revealed three groups jockeying for power inside firms: wealthy elites holding large blocks of stock; corporate managers, who often sought a role at the top of the corporate hierarchy with little financial stake; and a growing mass of small stockholders. Legal innovations in shareholder voting over the nineteenth century created a nearly constantly changing balance of power in corporate governance, which was made only more complex by economic developments in a dynamic, industrializing economy. Against this backdrop, the balance of power inside firms was slowly tilting in favor of corporate managers, who entered the twentieth century with the upper hand.

In nineteenth-century America, per-share vote allocations were an important determinant of shareholder voting power, and so were two other dimensions of shareholder voting: the rights to delegate and to cumulate the shareholder vote in a corporate election. As this Article has shown, these three dimensions of shareholder voting developed dynamically over what was, in hindsight, a century of kinetic change in corporate power. The three-dimensional model helps explains that kinetic change—and provides a new perspective on the rise of one-share-one-vote—while reconceptualizing the present. When we cease to focus exclusively on vote allocations, our picture of shareholder voting rights gains significant depth.

This Article’s new account of nineteenth-century history suggests that the rise of proxy voting contributed to the shift to one-share-one-vote. The question of why democratic corporate voting was replaced by one-share-one-vote over the nineteenth century remains an important, if unresolved, historical mystery. Today we know, for example, that the shift to one-share-one-vote was essential to the emergence of the “rationally apathetic shareholder” who devalues or even foregoes control rights.³⁰³

Assessment of nineteenth-century shareholder voting rights reveals not only three interactive dimensions of shareholder voting, but a tripartite division of power operating behind them. The three-group paradigm is evident in the changing mix of voting-rights laws and the interests that these changes served. Graduated voting schemes, which were common in the early nineteenth century, curbed the voting power of wealthy block-holders in favor of small shareholders. Proxy voting, too, held promise to empower small shareholders—but was swiftly co-opted by corporate managers to enhance their own power. Corporations that used restricted voting were particularly vulnerable to proxy abuse. In a few states, legislatures enacted laws prohibiting proxy voting by managers—but states also responded with a gradual shift in favor of one-share-one-vote, first as a default and later as a mandatory rule. One-share-one-vote shifted power in favor of wealthy block-holders, problematizing shareholder governance all over again. The invention of the right to cumulative voting, in the last three decades of the century, functioned to restore a measure of voting power to small holders as a partial response to vote allocations and proxy practices that had empowered both large block-holders and corporate managers. The political popularity of cumulative voting was a testament to Americans’ urgent desire to rebalance power inside corporations.

The three-group paradigm is important not only because it lies behind the three-dimensional change in shareholder voting rights during the nineteenth century (and today), but also because it stands in contrast to the two-group paradigm that would go on to define twentieth-century corporate theory. Early twentieth-century corporate theorists noted an emerging separation of ownership and control, and law-and-economics scholars characterized the separation as involving two—not three—corporate constituencies battling each other for dominance. The separation of ownership and control collapsed distinctions among shareholders and treated wealthy, block-holding shareholders and working-class, small shareholders as members of a monolithic group. In the classic model, shareholders and managers faced off across a bilateral divide. Yet, a close history of nineteenth-century shareholder voting rights suggests a trilateral power struggle, one that was recognized politically and in law.

Recent developments are challenging paradigms that were nearly set in stone by the end of the nineteenth century. Two of the three dimensions of shareholder voting rights are once again in flux, with dual-class structures responding to re-concentration and with new rules around mutual fund voting, broker voting, pass-through voting, and the universal proxy. Though the ultimate result of these changes cannot be known—and though today’s change is being driven at the national level, in contrast to the nineteenth century’s state-by-state change—the history of nineteenth-century shareholder voting rights provides some clues about what happens when parallel sets of rules governing shareholder voting rights evolve in relation to each other. Winners and losers will emerge as power resolves itself through the shareholder franchise.

96 S. Cal. L. Rev. 881

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Sarah C. Haan*

* Class of 1958 Uncas and Anne McThenia Professor of Law, Washington and Lee University School of Law. For their thoughtful feedback on drafts of this article, the author thanks Eric Hilt, Andrew Jennings, Elizabeth Pollman, and Jonathon Zytnick, and the faculties of Brooklyn Law School and the University of Houston Law Center. She is grateful to Alexander Keyssar for his generous insights, and to the editors at the Southern California Law Review for their superb editing.

Tag: Voting Rights

Voting Rights in Corporate Governance: History and Political Economy

INTRODUCTION

I. THE SHAREHOLDER’S RIGHT TO DELEGATE THE VOTE

A. Proxy Solicitation

B. Benefits of Proxy Voting

C. Proxy Abuse

D. Statutory Limits on Proxy Voting

E. The Purchase and Sale of Proxies

F. Proxy Voting as a Shareholder Right

II. PER-SHARE VOTE ALLOCATIONS

A. Restricted Voting in Corporate Elections

B. Three Theories

C. One-Share-One-Vote and General Incorporation Laws

D. Virginia’s 1837 Voting-Rights Scheme

E. One-Share-One-Vote as a Protection Against Proxy Abuse

F. Shareholder Voting Beyond Director Elections

G. The Disappearance of Restricted Voting

III. THE SHAREHOLDER’S RIGHT TO CUMULATE VOTES

A. The Invention of Cumulative Voting

B. Cumulative Voting Meets Resistance

C. A Century of Relative Stability

IV. EPILOGUE: A NEW ERA OF DYNAMIC CHANGE

A. The Re-Concentration of Voting Power in the Big Three

B. A Countervailing Trend: Dual-Class Structures

C. Changes in Favor of Beneficial Holders

D. Pass-Through & Client-Directed Voting

E. The Universal Proxy

CONCLUSION

96 S. Cal. L. Rev. 881

Modern-Day Poll Tax: How LFO Requirements Undermine Felons’ Right to Vote

Detention, Disenfranchisement, and Doctrinal Integration