Voting Trust Certificate
A digital document given to shareholders in exchange for their common stock
What Is a Voting Trust Certificate?
A voting trust certificate is a digital document given to shareholders in exchange for their common stock. It represents the shareholder’s rights as the owner of a common stock. These rights may include receiving dividends, etc., but they are exclusive of voting rights.
The trustee is often a third party given the authority to vote on behalf of shareholders regarding any decisions brought before them. These could be anything from approving or blocking mergers/acquisitions to electing the company’s directors.
In this way, these certificates can be quite helpful in preventing a company's hostile takeover by letting shareholders transfer their voting rights to a third-party trustee who can vote against the takeover.
Therefore, these voting trust certificates are often used when a large block of shareholders wants to have a greater say in a company's management but wants to avoid acquiring a controlling interest.
Voting trust certificates can also ensure that all shareholders' interests and opinions are considered before making an important decision.
These digital documents can be set up for a predetermined period. Usually, this ranges from five to ten years, after which the voting rights are returned to the shareholders.
Key Takeaways
- Voting trust certificates are legal instruments that enable a company’s shareholders to give their voting rights to a third party for a specific time period.
- Voting trust certificates can also be used to avoid hostile takeovers of the company by letting shareholders transfer their voting rights to a trustee who can vote against the takeover.
- Voting trust certificates can be set up for a given period, usually between 5 to 10 years, after which the voting rights are transferred back to the shareholders.
- The document outlining the agreement between the shareholders and the trustee includes the names of the shareholders, the trustee, the length of the trust, the voting rights being transferred, and any limits to the trustee's voting power.
Recognizing The Terms Of A Voting Trust Agreement
Voting trust agreements are filed with the Securities and Exchange Commission (SEC), and the terms of the trust are outlined in the voting trust certificate, which is the focus of this article.
The terms of the document usually incorporate the information mentioned below:
- Names of the relevant shareholders transferring their voting rights, along with the number of shares they hold.
- Names of the relevant trustees who are voting on behalf of the shareholders.
- The length (in years) of the agreement. As previously mentioned, this is usually between 5 and 10 years.
- The rights that are being transferred to the trustee for voting. As discussed previously, these may include electing new directors or decisions regarding the consolidation or dissolution of the firm.
- Any limitations the shareholders may want to put on the voting power given to the trustee. This could include ensuring that all votes are made following the shareholders' values.
- The responsibilities are given to the trustee as per the agreement. Trustees need to ensure that they account for shareholders' interests when making any decisions for the company.
- The processes are to be followed if the trust is dissolved and voting rights are to be returned to the shareholders.
- Finally, it may also include the compensation given to the trustee for fulfilling their role in the agreement. By default, there is no compensation. However, shareholders can allow for some amount if the majority of them agree to do so.
How to Draft A Voting Trust Certificate
The process of how this document is drafted consists of several steps. The following section provides a brief overview of each of them.
1. Identifying which shareholders want to give their rights to vote to a third party
It is important to ensure that we know which shareholders want to transfer their voting rights to a trustee. These shareholders must then specify the number of shares they own in the company and agree to the terms in the voting trust certificate.
2. Choose a trustee
The shareholders choose a trustee who is held responsible for voting on any matters regarding the firm on behalf of the shareholders. The trustee could be a person or an institution, so long as they are independent of the company they vote for.
3. Lay out the terms of the trust
The shareholders and the trustee must be on the same page regarding the terms mentioned in the trust. This ranges anywhere from the duration of the trust and the voting rights transferred to any limitations on the voting power that the trustee has.
4. Drafting the document
Then, the outline of the voting trust certificate is constructed.
5. Review and sign the voting trust certificate
Shareholders and the trustee must review and sign the document to ensure it is legally binding.
6. Filing the voting trust certificate
After the certificate is executed, it must be filed with the appropriate government agency. This is usually the SEC.
7. Monitor voting rights
The trustee should monitor the voting rights and vote as agreed with the shareholders in the voting trust certificate.
It is important to note that legal counsel is often used to ensure that the voting trust certificate is drafted correctly and complies with the relevant laws and regulations.
Note
Voting trust certificates differ from proxy voting, where a shareholder authorizes another person, a proxy, to vote on their behalf at a particular shareholder meeting or series of meetings.
Voting Trusts vs. Proxy Voting
Voting trusts and proxy voting are both methods that enable shareholders to exercise their voting rights, but they differ in several key ways.
Let us discuss some of them.
| Voting Trusts | Proxy Voting |
|---|---|
| The trustee votes on behalf of the shareholders on all matters relating to the company within the bounds of their voting power. | Proxy voting entails another person, authorized by the shareholder, voting on behalf at a shareholder meeting. |
| It is a legally binding agreement between shareholders and a trustee in which the shareholders transfer their voting rights to the trustee for a pre-specified time period. | It is merely a temporary arrangement made between the shareholder and the proxy. |
| A trustee could be an individual or an institution appointed for all meetings throughout the time period of the agreement. | A proxy may be an individual or an institution usually appointed for a specific meeting or series of meetings that the shareholder cannot attend. |
In summary, while voting trusts and proxy voting allow shareholders to exercise their voting rights, voting trusts involve transferring voting rights to a trustee for a specified time period.
On the other hand, proxy voting allows the shareholders to appoint a representative to vote on their behalf at a particular meeting.
Voting trusts are helpful in situations where a large number of shareholders want to have more of a say in how the company is managed. In contrast, proxy voting is usually used for individual shareholders who cannot make it to a shareholder meeting in person.
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