What Is a Voting Trust Agreement?
A voting trust agreement is an authoritative contractual arrangement where shareholders with voting rights temporarily transfer those rights to a trustee in exchange for a voting trust certificate. This arrangement hands over temporary control of the corporation to the voting trustees. The specific details of the voting trust agreement, such as duration and shareholders’ rights, must be filed with the SEC.
How a Voting Trust Agreement Works
Typically operated by a company’s current directors, voting trust agreements serve as strategic measures against hostile takeovers. Alternatively, they can be utilized by individuals or groups aiming to seize control, such as creditors of a struggling company. These trusts are notably prevalent in smaller businesses due to the simpler management of such agreements.
Voting trusts share similarities with proxy voting in that shareholders appoint someone else to vote on their behalf. However, voting trusts differ significantly; they are more enduring and designed to provide a consolidated group of voters with increased influence or even control over the company, contrasting with the often temporary nature of proxy votes meant for specific events.
Requirements for a Voting Trust Agreement
Voting trust agreements required by the Securities and Exchange Commission (SEC) specify the duration of the agreement—usually defined by years or culminating events. They delineate shareholders’ rights, including continuous dividend receipt, procedure during mergers, potential consolidation or dissolution activities, and trustees’ duties and rights concerning the votes’ application.
In certain voting trusts, trustees might also obtain extra privileges, such as the authority to sell or redeem shares. At the trust’s conclusion, shares generally revert to the original shareholders. However, many voting trust agreements provision for renewal with identical terms to perpetuate the trust’s structure.
Key Takeaways
- Voting trust agreements allow shareholders to transfer their voting rights to a trustee, giving trustees temporary control over the corporation.
- Predominantly found in smaller companies, these agreements are pivotal in preventing or facilitating corporate takeovers.
- Voting trust agreements typically extend over longer durations, enhancing the collective power of shareholders compared to the temporary nature often associated with proxy voting.
Related Terms: shareholder agreement, proxy voting, corporate governance, hostile takeover, SEC compliance.
