What Is a Voting Trust Agreement?
Let me explain what a voting trust agreement is. It's a contractual setup where shareholders who have voting rights transfer their shares to a trustee, and in return, they get a voting trust certificate. This hands temporary control of the corporation over to the voting trustees.
Important Details
You should know that the details of a voting trust agreement, such as how long it lasts and the specific rights involved, are outlined in a filing with the SEC.
How a Voting Trust Agreement Works
Voting trust agreements are typically run by the current directors of a company as a way to fend off hostile takeovers. However, they can also be used by someone or a group aiming to take control, like creditors looking to reorganize a struggling business. These are more common in smaller companies because they're easier to manage there.
They're similar to proxy voting in that shareholders let someone else vote on their behalf. But voting trusts differ from proxies. A proxy might be temporary or just for one vote, while a voting trust is usually more permanent, designed to boost the power of a group of voters or even give them control of the company—which isn't always the case with proxies.
Requirements for a Voting Trust Agreement
Voting trust agreements need to be filed with the Securities and Exchange Commission (SEC), and they specify the duration—usually a set number of years or until a specific event occurs.
They also detail the shareholders' rights, like continuing to receive dividends; procedures for events like mergers, consolidations, or dissolution of the company; and the duties and rights of the trustees, including what the votes will be used for. In some cases, the trustee gets extra powers, such as selling or redeeming the shares.
When the trust period ends, the shares generally go back to the shareholders, though many agreements include provisions to revest them in the voting trust under the same terms.
Key Takeaways
- Voting trust agreements let shareholders transfer their voting rights to a trustee, giving the trustee temporary control of the corporation.
- These agreements are usually seen in smaller companies and are often used to prevent or enable takeovers.
- Unlike proxy voting agreements, voting trust agreements tend to last longer, such as for a number of years.
