What is a Voting Trust?
A voting trust is a strategic legal structure allowing shareholders to combine their voting power by temporarily transferring their shares to a chosen trustee. In return, shareholders receive certificates confirming their status as beneficiaries of the trust. Typically, the trustee must vote per the wishes of the participating shareholders.
Key Takeaways
- A voting trust is an agreement where shareholders transfer their shares and voting rights temporarily to a trustee.
- A voting agreement refers to shareholders agreeing on a voting strategy without giving up their shares or voting rights.
- Voting trusts help in preventing hostile takeovers, retaining majority control, and resolving conflicts of interest.
How a Voting Trust Works
Voting trusts are often formed by company directors, though groups of shareholders may also constitute one to exercise greater control over the corporation. Voting trusts can help resolve conflicts of interest, enhance voting power, or protect against hostile takeovers. The trust arrangement details the continuation of dividend payments and other distributions to beneficiaries. State laws vary in specifying the duration of voting trusts.
Occasionally, voting trusts are formed by shareholders with limited interest in the company’s operations. In such cases, trustees may be granted discretion in exercising voting rights.
In the U.S., companies must file voting trust contracts with the Securities Exchange Commission (SEC), detailing how the trust is executed and outlining the relationships between shareholders and trustees. The agreement also includes the duration and specific stipulations.
Alternatively, shareholders can establish a shareholder voting rights agreement to vote collectively. Unlike in a voting trust, shareholders don’t transfer their shares, retaining their shareholder status. A voting trust typically lasts 10 years and can be extended for another decade if all parties agree.
Voting Trusts versus Voting Agreements
Rather than assigning voting rights to a trustee, shareholders can create a voting agreement, also known as a pooling agreement, harmonizing their votes on specific issues. This approach helps retain control without surrendering their shareholder identities, unlike voting trusts. However, voting agreements are not permissible among directors to influence their decision-making or purchase votes.
Example of a Voting Trust in Action
In a merger or acquisition, stakeholders mindful of preserving majority control may form a voting trust to unite their votes, strengthening their collective voice. Although this strategy doesn’t guarantee an aligned outcome, it maximizes the impact shared by consolidated voting power.
Related Terms: Shareholder, Conflict of Interest, Dividend, Voting Rights, Securities Exchange Commission.
References
- United States Securities and Exchange Commission. “Form 4 Statement of Changes of Beneficial Ownership of Securities”, Pages 3-4.
- California Legislative Information. [“Chapter 7. Voting of Shares [“700 - 711"]”](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=706.&lawCode=CORP).
