A voting trust is an arrangement that a shareholder will enter into to transfer voting rights of a security to a trustee or trustees. This trustee (or trustees) then holds those voting rights until the trust ends, or the shareholder’s voting rights are returned. The transfer of voting rights allows the trustee to have voting control of the company, which can allow them to influence company policies and elect directors or officers.
The main purpose of a voting trust is to reduce corporate conflicts of interest and make sure decisions are made in the best interest of all shareholders. Voting trusts are also used by shareholders to consolidate ownership and control of securities, prevent hostile takeovers, or transfer legal or fiduciary obligations.
How Does a Voting Trust Work?
When a shareholder chooses to enter into a voting trust arrangement, he or she will transfer the voting rights of their shares to one or more trustees. The trustees can then use the shareholders’ voting rights on behalf of all the shareholders for issues such as electing directors or officers, or to pass certain resolutions. Those trustees are then given specific instructions as to how to use those voting rights.
The trustees are usually board members or executive officers, but they can also be independent trustees who may be more closely connected to the corporation than a board member. The trust agreement will usually specify how long the trust will last, and what restrictions the trustees’ have with regard to voting rights.
Real-World Example of a Voting Trust
An example of how a voting trust could work is shown by the proposed merger of AOL and Time Warner. The proposed merger was approved by the overwhelming majority of AOL shareholders through the voting trust. The shareholders transferred their voting rights to a three-person trust who represented the interests of the shareholders. The trust then cast the votes for the merger, which enabled the merger to go forward and create AOL Time Warner.
Voting trusts are also used in situations where shareholders are in dispute over corporate control. The most famous example of this is the battle between Carl Icahn and Ted Forstmann over control of toy maker Toys “R” Us. In this case, the shareholders transferred their voting rights to a voting trust that voted with the majority opinions of Icahn and Forstmann in order to reach a compromise.
The Bottom Line
While voting trusts are not commonplace, they can be an effective way for shareholders to consolidate ownership and ensure that their interests are represented. They can also help reduce corporate conflicts of interest, and can be used in situations where shareholders are in dispute. However before entering into a voting trust agreement, be sure to consult with an attorney or financial advisor who can advise you on the legal and financial implications.