It Was My Understanding There Would Be No Math…
A few weeks ago, on a lovely Saturday at Wrightsville Beach, NC, I was in a small banquet room, assisting a Homeowner's Association with a special meeting calling for the removal of directors. There were two large factions in the Association and on the Board. One faction had collected a sufficent number of petitions to call for the removal of the majority of the sitting Board members. I was asked to take a fairly active role in the running of the meeting to ensure that the law was properly followed by both factions and there would be no procedural problems.
With only that one item on the agenda, whether or not to remove Directors 1-4, how hard could it be? Well, I found out. To understand the removal, you first have to understand the election. You see, these directors had been voted on to the Board by cumulative voting. The North Carolina condominium Act and the North Carolina Model Non-profit Business Act both allow cumulative voting for the election of Directors. Cumulative voting is designed to allow a minority faction to gain some representation on a Board. For example, suppose you have 3 seats up for election. Under straight voting, each member would have one vote for each seat. That allows 51% majority faction to elect all three members (and have 100% of the Board). Under cumulative voting, each member gets three votes, but can vote all three of them for one seat. This way, a minority can pool their votes and get at least one member on the Board.
This meeting however, was to remove a Director. This is allowed in North Carolina under the Condominium Act by a 67% vote, with or without cause. Fairly straightforward math. However, under the Nonprofit Act, if the Directors are elected with cumulative voting, there is another calculation. Under the Non-profit Corporations Act, §55A-7-25, if the director is elected by cumulative voting, they can be removed “unless the votes cast against removal would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast and the entire number of directors elected at the time of the director’s most recent election were then being elected.” The more you read that quote, the more confusing it gets.
The goal here is to close a loophole in cumulative voting. See if 20% of a membership pooled their votes together sufficently to elect a Director to a Board, under the removal process, the larger faction could just vote them back out again. Hence the above language. I really had to know what this meant and how it was applied because I needed to explain to both sides why I was calculating the votes the way I was. I did a lot of reseach and am convinced that a lot of lawyers across the country (the NC rules are based almost entirely on a Model Act that has been adopted in several States) don't really understand it either. They just dump the whole quote into their memo or brief, present it as obvious, and hope nobody asks them about it.
I finally had to go back to a 1950 Law Review article that drafted an equation (its actually an inequality for the math geeks out there) that could be used by a minority faction to determine the maximum number of Directors they could vote onto a Board. Other articles then took that formula and used it to to determine the number of votes that would block the removal of a Director. The formula is as follows:
X is the number of votes needed to defeat the recall measure. S represents the total number of votes being cast at the recall meeting, not the total number of members in the association. In the removal situation, N is always equal to 1, even if the meeting is being called to remove two directors. For each director to be removed, there should be separate votes, one for removal of each individual director. In each instance, N, in the formula, would be 1.(In the use of the equation in an election, N would be the number of Directors the minority was trying to elect). D is the total number of directors elected at the most recent election at which the director to be recalled was elected. One question I had was why the +1 at the end of the equation? According to the official comment to the Model rule, the computation should consider that “all votes cast for removal of the director had been cast cumulatively in an efficient pattern for the election of a sufficient number of candidates so as to deprive the director whose removal is being sought of his office.” The “+1” makes it so that, for example, in a race to elect three seats, the winning threshold would be one vote more than 25% of the vote—a total that would be mathematically impossible for four candidates to reach.
The next question I got was why is N equal to 1. The statute provides for “a” director and “such” director, and therefore contemplates a vote to remove a single director. The vote is independent of how many other directors are being voted out. Otherwise, the petitioners for removal could manipulate the amount of votes needed by petitioning the removal of more directors. For N to be more than one, the vote would have to be to remove that number of directors in a block. The statutes and the petition itself, calls for individual removal voting.
The odd thing in this election was that it was actually a majority of the Board members where were being voted off, but under the statute they were each voted on as if they were a sole minority. One suggestion was that the votes for removal be voted cumulatively as well, but under the statutes, cumulative voting is only allowed for elections, not any other actions, including removal.
After all that brainpower and math, none of the Directors had 67% for removal, so the formula didn't even come into play. But the next question from the Board and the membership was "how can we amend the By-laws so we don't have to have cumulative voting anymore…"
-Bradley A. Coxe is a practicing attorney in Wilmington, NC who specializes in Personal Injury, Car Accidents, Medical Malpractice, Contract and Real Estate disputes, and all forms of Civil Litigation. Please contact him at (910) 772-1678.