Legal Definitions - nonvoting stock

Nonvoting stock refers to shares of ownership in a company that do not grant the holder the right to vote on corporate matters. While holders of voting stock can typically participate in decisions such as electing the board of directors, approving mergers, or making significant changes to company policy, owners of nonvoting stock do not have this privilege.

Despite lacking voting rights, nonvoting stock often comes with other benefits, such as preferential treatment in dividend payments (receiving dividends before common stockholders) or a priority claim on company assets if the business is liquidated. It is a way for companies to raise capital or distribute ownership without altering the control structure or diluting the voting power of existing shareholders.

Here are a few examples to illustrate:

• Startup Funding with Founder Control: Imagine "InnovateTech," a promising tech startup, needs to raise capital to develop its groundbreaking software. The founders want to secure investment but are determined to maintain complete control over the company's strategic direction and board appointments. To achieve this, they issue "Series B Preferred Nonvoting Stock" to venture capitalists and angel investors. These investors receive a share of future profits and a priority claim if the company is sold, but they cannot vote on who sits on the board or major company decisions. This arrangement allows the founders to secure necessary funding without diluting their decision-making power.

• Family Business Succession Planning: Consider "Heritage Foods," a successful family-owned bakery. The patriarch, Mr. Lee, wants to distribute ownership shares to his adult children as part of his estate planning, allowing them to benefit from the company's success. However, he intends to remain CEO and maintain sole control over the company's operations and future strategic decisions until his retirement. Mr. Lee gifts his children shares of "Class B Nonvoting Common Stock." These shares entitle his children to receive dividends and a portion of the company's value, but they do not grant them the right to vote on matters like electing board members or approving mergers. This ensures the children benefit financially while Mr. Lee retains full governance control.

• Public Company Capital Raise: "Global Pharma Corp.," a large publicly traded company, seeks to raise a significant amount of capital for a new research and development initiative. The current majority shareholders and the board of directors want to avoid diluting their voting power or risking a hostile takeover by issuing new shares that carry voting rights. The company decides to issue "Preferred Nonvoting Shares" to institutional investors and the public. These shares offer a fixed dividend payment and a degree of stability, making them attractive to certain investors. Because they are nonvoting, the issuance of these shares does not impact the existing shareholders' control over the company's governance, board elections, or major corporate policies.