Understanding Voting Trust Agreements: Purpose and Function

What Is a Voting Trust Agreement?

A voting trust agreement lets shareholders temporarily transfer their voting rights to a trustee in exchange for voting trust certificates, giving the trustee control over how the shares are voted. Companies use these agreements to concentrate voting power for longer periods than a usual proxy, which can help stabilize corporate governance and deter hostile takeovers.

Understanding How Voting Trust Agreements Function

Voting trust agreements are usually operated by the current directors of a company, as a countermeasure to hostile takeovers. But they may also be used to represent a person or group trying to gain control of a company—such as the company's creditors, who may want to reorganize a failing business. Voting trusts are more common in smaller companies, as it is easier to administer them.

Voting trusts are similar to proxy voting, in the sense that shareholders designate someone else to vote for them. But voting trusts operate differently from a proxy. While the proxy may be a temporary or one-time arrangement, often created for a specific vote, the voting trust is usually more permanent, intended to give a bloc of voters increased power as a group—or indeed, control of the company, which is not necessarily the case with proxy voting.

Key Requirements for Establishing a Voting Trust Agreement

Voting trust agreements, which have to be filed with the Securities and Exchange Commission (SEC), specify how long the agreement lasts for—which is usually for a number of years, or until a certain event happens.

They also outline the rights of the shareholders, such as the ongoing receipt of dividends; procedures in the event of a merger, such as consolidation or dissolution of the company; and the duties and rights of trustees, such as what the votes will be used for. In some voting trusts, the trustee may also be granted additional powers, like the freedom to sell or redeem the shares.

At the end of the trust period, the shares are usually returned to the shareholders, although in practice many voting trusts contain provisions for them to be revested on the voting trusts with identical terms.

The Bottom Line

Voting trust agreements transfer shareholders' voting rights to a trustee, giving temporary control that can help smaller companies maintain stability and deter hostile takeovers. Unlike proxy voting, they usually last longer and grant broader authority.

They also require formal terms and filings, including SEC submissions and clear outlines of shareholder rights and trustee powers.