What is a voting trust?
A voting trust is a legal trust in which shareholders temporarily transfer their shares to the trustee to pool their voting power. Shareholders get certificates proving they are trust beneficiaries in return for their shares. Often, the trustee must vote in line with the desires of these involved shareholders.
How Voting Trusts Operate
To exert some influence over the firm, a group of shareholders may sometimes organize a voting trust, but corporate directors often create voting trusts. In addition, it may be utilized to prevent a hostile takeover, address conflicts of interest, and give shareholders more voting power. The beneficiaries will generally continue to receive dividend payments and any other distributions from the company, as specified under the trust agreement. Each state has its own laws governing the duration of a trust.
Sometimes, stockholders who don’t have a significant stake in the business’s operations create voting trusts. In this situation, the trustee may be granted discretion in using their voting privileges.
US corporations must submit voting trust contracts to the Securities Exchange Commission (SEC). The agreement must specify the connection between the shareholders and the trustee and the terms of how the voting trust will be administered. The agreement’s length and other conditions will also be included.
Alternatively, the shareholders might draft a shareholder voting rights agreement stating they would cast their votes together. Under this arrangement, the shareholder maintains their status as the shareholder of record and does not transfer their shares to the trust.
A voting trust may be extended for an additional ten years with the consent of all parties, but its maximum term is ten years.
Voting Agreements vs. Voting Trusts
Shareholders may jointly create a contract or voting agreement to vote in a particular manner on matters rather than giving a trustee voting powers. In contrast to a voting trust, this agreement—also called a pooling agreement—allows owners to acquire or keep control without sacrificing their identities as stockholders. Voting agreements cannot be utilized to purchase votes, limit directors’ discretion, or create divisions among the directors.
Example
Occasionally, after a merger or acquisition, the target company’s shareholders choose to maintain majority control. They unite and cast their votes as a single entity by creating a voting trust, strengthening their voice more than they could have done alone. That being said, there is no assurance that this action will provide the results the trust hopes for.
Conclusion
- A voting trust is an agreement between shareholders wherein their shares and the power to vote are temporarily given to a trustee.
- A voting agreement is a contract that allows shareholders to retain their shares and voting rights while agreeing to vote in a particular manner on specific subjects.
- Voting trusts are established for various purposes, such as settling conflicts of interest, maintaining majority control, and thwarting hostile takeovers.
