Voting Trust: What it is, How it Works, Example

What Is a Voting Trust?

A voting trust is a legal trust created to combine the voting power of shareholders by temporarily transferring their shares to the trustee. In exchange for their shares, shareholders receive certificates indicating they are beneficiaries of the trust. The trustee is often obligated to vote in accord with the wishes of these participating shareholders.

How a Voting Trust Works

Voting trusts are often formed by company directors, but sometimes a group of shareholders will form one to exercise some control over the corporation. It can also be used to resolve conflicts of interest, increase shareholders' voting power, or ward off a hostile takeover. The trust agreement typically specifies that the beneficiaries will continue to receive dividend payments and any other distributions from the corporation. The laws governing the duration of a trust differ from state to state.

Sometimes, voting trusts are formed from shareholders who do not have a strong interest in the operation of the company. In this case, the trustee may be allowed discretion in exercising voting rights.

In the United States, companies must file voting trust contracts with the Securities Exchange Commission (SEC). The contract must detail how the voting trust will be executed and the relationship between the shareholders and the trustee. In addition, the duration of the agreement and any other stipulations will be included.

As an alternative, shareholders may draw up a shareholder voting rights agreement specifying that they will vote as a block. With this type of agreement, the shareholder does not transfer their shares to the trust and therefore remains the shareholder of record.

Voting Trusts Versus Voting Agreements

Rather than assign voting rights to a trustee, shareholders may collectively form a contract, or voting agreement, to vote a certain way on issues. This agreement, also known as a pooling agreement, allows shareholders to gain or maintain control without giving up their identities as stockholders as with a voting trust. Voting agreements cannot be used between directors, to restrict the discretion of directors, or to buy votes.

Example of a Voting Trust

Sometimes, in a merger or acquisition, shareholders of the target company want to retain majority control after the transaction concludes. By forming a voting trust, they come together and vote as one, amplifying their voice better than what could be done without it. However, this measure offers no guarantee that the outcome will match the desires of the trust.