A voting trust is an arrangement under which legal ownership of shares belonging to one or more shareholders are transferred to a trustee, along with the voting rights attached to those shares, usually for a specified period of time. The shareholders retain beneficial ownership of the shares and all other rights and benefits, except for the right to vote the shares. At the end of the trust, the shares are re-transferred back to the beneficiaries (the shareholders).
To establish a voting trust, the shareholders enter into a trust agreement with the trustee, establishing the provisions of the trust, transferring legal title of their shares to the trustee, and granting the trustee the right to vote the shares. In some voting trusts, the trustee may also be granted additional powers in order to accomplish the purposes of the trust (such as the authority to sell or redeem the shares).
What is the purpose of a voting trust?
There are a number of reasons why a voting trust arrangement might be beneficial to shareholders. By consolidating the voting power of their shares, they can collectively hold a sufficient percentage of the company’s voting shares that they would not have individually, which – as a voting bloc – would give them the power to force the calling of meetings, elect specific directors, and generally exert or safeguard control of the company.
Locking shares up into a voting trust can be used as a means to facilitate a corporate reorganization, or to avoid a hostile takeover of the company by aggregating a certain percentage of shares into the trust and protecting them from being acquired in connection with a potential takeover bid.
A voting trust can also operate as a short-term proxy solution for a period of time during which the shareholders will be unavailable to attend and vote at meetings, or as a convenience. By appointing a trustee to vote their shares, the shareholders free themselves from the necessity of attending meetings, voting on key issues, and dealing with other responsibilities associated with share ownership.
A voting trust known as a “blind trust” can also be used as a mechanism to resolve conflict of interest situations. In a blind trust, the trustee has full discretion over the trust assets (the shares) and votes the shares at arm’s length from the beneficiaries of the trust (the shareholders).