What Is a Voting Trust?
Let me explain what a voting trust is directly to you: it's a legal trust you create to pool the voting power of shareholders by temporarily handing over their shares to a trustee. In return, those shareholders get certificates showing they're beneficiaries of the trust. The trustee usually has to vote according to what these participating shareholders want.
Key Takeaways
Here's what you need to know upfront. A voting trust is essentially a contract among shareholders where they transfer their shares and voting rights temporarily to a trustee. On the other hand, a voting agreement is a deal where shareholders commit to voting a specific way on certain issues without surrendering their shares or rights. You form voting trusts for various reasons, like stopping hostile takeovers, keeping majority control, or sorting out conflicts of interest.
How a Voting Trust Works
Voting trusts are frequently set up by company directors, but sometimes groups of shareholders do it to gain some control over the corporation. You might use one to fix conflicts of interest, boost shareholders' voting strength, or block a hostile takeover. The trust agreement usually states that beneficiaries keep getting dividend payments and other distributions from the company. Keep in mind, the rules on how long a trust can last vary by state.
Occasionally, these trusts come from shareholders who aren't deeply involved in the company's operations. In those cases, the trustee might have some leeway in how they exercise voting rights.
In the United States, companies have to file voting trust contracts with the Securities Exchange Commission (SEC). That contract must outline how the trust will operate, the ties between shareholders and the trustee, the agreement's duration, and any other conditions.
As an alternative, you could set up a shareholder voting rights agreement where everyone agrees to vote as a block. With this, shareholders don't transfer their shares to a trust, so they stay as the recorded owners.
Important Note on Duration
Remember, a voting trust is valid for up to 10 years maximum, and if everyone agrees, you can extend it for another 10 years.
Voting Trusts Versus Voting Agreements
Instead of handing voting rights to a trustee, shareholders can make a contract, or voting agreement, to vote a particular way on issues. This is also called a pooling agreement, and it lets them gain or keep control without losing their status as stockholders, unlike in a voting trust. You can't use voting agreements between directors, to limit directors' discretion, or to buy votes.
Example of a Voting Trust
Take a merger or acquisition scenario: shareholders of the target company might want to hold onto majority control after the deal. By forming a voting trust, they unite and vote as one, which strengthens their position more than going solo. That said, there's no assurance the result will align perfectly with what the trust wants.
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