What is a voting trust agreement?
In exchange for a voting trust certificate, shareholders with voting rights surrender their shares to a trustee under the terms of a voting trust agreement. As a result, the voting trustees gain momentary corporate control. A voting trust agreement’s specifics, such as its duration and rights, are outlined in a filing made with the SEC.
The Operation of a Voting Trust Agreement
The company’s incumbent directors often manage voting trust agreements to prevent hostile takeovers. However, they may also symbolize an individual or organization attempting to take over a corporation, such as the creditors who want to restructure a failing enterprise. Because they are simpler to manage, voting trusts are more prevalent in smaller businesses.
Voting trusts and proxy voting are comparable because shareholders choose a third party to vote on their behalf. Yet, voting trusts function distinctly from proxies. A voting trust is often more permanent and aims to offer a group of voters more collective authority or even control over the corporation. At the same time, a proxy may be a transient or one-time arrangement, generally formed for a single vote.
Conditions for a Voting Trust Agreement
The duration of voting trust agreements, which must be submitted to the Securities and Exchange Commission (SEC), is specified. Typically, this is for several years or until a specific event occurs.
They also describe the rights of shareholders, including the continuance of dividend payments; the processes to be followed in the case of a merger, including business dissolution or consolidation; and the responsibilities and powers of trustees, including the allocation of votes. The trustee may also be given further authority under some voting trusts, such as the right to redeem or sell the shares.
The shares are typically returned to the shareholders after the trust period. However, many voting trusts have arrangements enabling them to be revested on voting trusts under the same circumstances.
Conclusion
- By using voting trust agreements, shareholders may assign their voting rights to a trustee, granting the trustee temporary power over the organization.
- These agreements, often seen in smaller businesses, are frequently utilized to thwart or ease takeovers.
- Voting trust agreements, in contrast to proxy voting agreements, often have longer durations—a few years, for example.
