Voting Trust

A voting trust is an agreement between shareholders and trustees. These trusts happen when one shareholder or a group of shareholders relieve voting rights to a trustee or a group of trustees. The trustee/s gain all voting rights from the shareholder and acts on their behalf. 

Trustees will gain all rights to vote on company decisions about company actions, mergers, acquisitions, dividend payout, new securities, and who is elected to the board of directors. 

Although all voting rights are given up to the trustee, the original shareholders retain all the profits from the stocks. They receive all dividends and payouts. Rarely will shareholders receive all funds if the shares are sold unless the trust is given a right to sell a security. 

Giving up voting rights may seem ill-informed, but this system allows investors and business owners to access its many benefits or security. 

For example, voting trusts add a layer of security to the stock they own. With stocks locked inside of a trust, it blocks an outside source from purchasing too much stock and creating a hostile takeover. 

A trust would need the permission of the shareholders to sell the stock. This makes it much harder for a third party to purchase stock from a trust rather than on the market or from a large shareholder. 

Each original shareholder is given a trusted certificate to secure the securities and ensure legitimacy. These certificates dictate that the owner is a beneficiary of the voting trust.

Often these trusts are used to secure the power of the shareholders by combining the multiple votes each shareholder owns to prevent a takeover of the company and to resolve conflicts by putting the power into a smaller group or a person's hands. 

What Is A Trust?

A trust is an agreement between an individual or a company and a third party. The arrangement dictates that the third party will hold assets on behalf of the individual or company while making payments to beneficiaries. 

The third party is often called the “Trustee,” and the individual/company is the “Grantor.” Most trusts operate to secure the grantor’s assets and provide a stable flow of money to its beneficiaries. 

A trust, and more specifically, a voting trust, will hold the shares of an individual and send any money that comes from them, like dividends or payments, when shares are sold. 

Trusts like these are used to secure wealth as they often are more accessible and can transfer assets more easily than a will or any other form of inheritance. Other than inheritance, trust can be used to set up payments for the future. 

Sometimes trust will be set up to make payments to an individual to secure their financial future. This is usually done by a wealthy investor who wishes to retire with a sizable monthly income. 

Benefits of a Trust 

There are many benefits to investing in a trust. From family matters to company protection, there are a multitude of reasons for investing in a trust. The only main concern for these trusts is the voting power they control. Because with this power, a trust can change the course of a company. 

1. Controlling Your wealth 

The trust agreement can be very detailed. Trustees can dictate when payments get made, to whom, and how much payment is given. Not to mention keeping the trust as a revocable trust. 

This allows the assets to remain in possession of the original beneficiary. This can help to settle the inheritance problem of wealthy investors to their children. 

2. Protection of Legacy 

Once again, trusts are a way to secure who gains your wealth once you can’t work anymore. For companies, this can ensure who will take over the company once the owner/founder is gone. 

3. Privacy 

Compared to a will, trusts can be completely anonymous. Large wealth transfers can make headline news and hinder a company's work. For individuals, this can give them privacy on who inherits their possessions.

Not to mention, a trust set up for the next generation can minimize future court and attorney fees when settling inheritance. 

Types of Trusts 

There are two main types of trusts. Each has its benefits and drawbacks. Both are useful in their specific situations. It would help if you looked at what situation you currently are in to make the most informed decision.

1. Revocable Trust

A revocable or “living” trust is generally used to avoid probate and pass assets more easily. With a living trust, the Grantor (the person who set up the trust) can reclaim their assets anytime.

The grantor is also able to become a trustee or appoint a new trustee. They can also appoint a future trustee or benefit if the grantor passes.

These trusts are great for their flexibility but often succumb to estate taxes. So, for instance, these trusts operate similarly to if the assets were still in possession of the grantor.

2. Irrevocable Trust 

An irrevocable trust follows similarly. The grantor's assets are put under the trust and controlled by the trust. The difference is that the terms and agreements of the trust can’t be altered.

Once a trust is created, the grantor’s assets will be locked away from them until the trust term is over. The maximum length of a trust is 10 years. If needed, it can be extended for another 10 years.

Because of this length, these trusts are mainly used to block estate taxes as the grantor no longer has a legal obligation or tax liability on the assets.

Uses of Voting Trusts

There are multiple uses for voting trusts. Trusts contain many stockholders' stocks, so the trust gains a significant portion of stockholder votes in a company. Assembling power is one of the many reasons for these trusts. The remaining few are:

1. Resolving Conflicts

One main reason for these trusts is to stop conflicts arising between shareholders. Often, shareholders have differing opinions on what a company should do. This can halt company operations and potentially lose a company's profit.

A trust can solve these problems. When a group of shareholders gives up their voting right to the trust, the trust will try to mitigate conflicts and vote in favor to appease all their beneficiaries.

Often the practice of using a Blind Trust is the most common form of these voting trusts. Beneficiaries within the trust are not given information about the trust's total assets or their holding and decision within a company.

This helps to minimize conflicts between the shareholders by not revealing information about company policies.

2. Increasing Shareholder Power

When trusts have ownership over multiple stocks, their voting power increases. The trust can hold thousands of stocks and a strong presence in votes on company decisions.

A trust can use its large power to call meetings and push company policies. With the amount of power a trust can hold, they can use the leverage they have. With a combination of multiple shareholders, votes can swing in their favor.

3. Preventing Hostile Takeover

In the instance of a hostile takeover (when another rival company tries to buy shares to influence the vote on company policies), a group of shareholders can lock their stocks inside a trust.

The assets are then no longer in their possession and can’t be sold to the hostile company. This often deters the hostile company from continuing its takeover as they have to wait for the trust’s term to end before purchasing the stocks locked inside it.

4. Control

Successful people often try to buy into a company. With large capital backing them, some individuals can buy a large number of stocks to become members of a company's board.

This can threaten existing board members that need more capital on hand to maintain their power. By agreeing with a trust, they can transfer their shareholder voting rights to the trust to secure their and other shareholders’ power.

5. Company Reorganization 

Companies can often face financial hardship or instability. A solution to this problem is to reorganize. Reorganization is when a company begins to alter and completely change its operations, structure, and finances to hopefully save a company from failing.

Often a third party is called to manage this restructuring since these parties are unbiased and professional in their field of interest. They also require extensive reorganization knowledge as the company hires them.

6. Giving Shares to a Child

Voting trusts can also be used when a parent gives their child their shares. Once the child reaches the minimum age to own securities, they will be allowed to vote on the company's decision on their parents' behalf. 

In retirement, a parent may transfer their share to their children with the intent that the shares will be given to a voting trust with known and trusted trustees. The trust will then ensure that the parent’s securities are passed on to the next generation. 

They will also maintain the stock's health and try to grow its value before the stocks are handed down to the children. This can be an excellent long-term plan for an inheritance, as these trusts can last up to 10 years. 

7. Mergers and Acquisitions

Mergers and acquisitions happen when a large or similar-sized company joins another company to increase its profits, gain a larger market share, or take over the competition. However, the most common form of these mergers is hostile acquisitions. 

When a company begins a hostile takeover, it's often at the cost of the smaller company. Practices like these often leave smaller companies a fragment of their former shell as the large company reorganizes them for pure profit. 

Many shareholders will often lock their stocks within a trust to stop this from occurring, so the larger company cannot purchase them. The trust will then vote against the hostile company to limit its influence on the company. 

What is a Trust Agreement?

A trust agreement is contractual between the trust, the grantor, and the beneficiaries. The agreement states multiple terms and decisions of the trust. The agreement will generally declare that the voting power will be given to the trust. 

The agreement will decide other terms, such as the length of the trust, payment, who to pay, etc. The current director makes this agreement with the company. This is made so that a third party won’t take over the trust and, in turn, take over the company.

In the U.S., these agreements must be filled through the SEC (Securities and Exchange Commission). These agreements must follow these guidelines to be valid trust agreements. An agreement not submitted through the SEC is against the law and is void. 

These agreements should contain details on how the trust will be carried out, the relation between the trust, and beneficiaries, the trust period, procedures in the event of a merger or dissolution of the company, duties, rights, and compensation of the trustee, rights of shareholders, and any additional rights granted to the trustees.

Without an agreement, the third party has no power to hold assets, distribute payments to beneficiaries, etc. An agreement must be written and agreed to by both parties. 

Voting Trust Certificate 

A voting trust certificate is a document created by the trust that is given to a shareholder in exchange for the stocks the shareholder owns. By accepting the certificate, the shareholders agree to give up their voting rights and give them to the trust. 

The shareholder will have all remaining power of the stock. A certificate represents that the shareholder continues to operate the share/stock and has all original shareholder powers except the power to vote on company decisions. The power is given to the trust. 

The trust will make decisions about the company on behalf of the shareholders. The certificate will be terminated after the voting trust period ends. All shares will be returned to the original owners regardless of current value. 

These certificates are legally binding documents. Without one, the trust is not legal and, therefore, void. With a certificate, a company's shareholder gives the stock's voting rights to the trust. 

Once the length of the certificate ends, the right to vote will be returned to the shareholder. These periods can last anywhere from 2-10 years, depending on the use of the trust. If the length is too short, or a new problem occurs, a trust and certificate can be remade and extended. 

Research and Written by William Hernandez-Han | LinkedIn

Reviewed and Edited by Shahrukh Azim Butt | LinkedIn 

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