What is a Voting Trust Certificate?
A voting trust certificate is a document used to give temporary voting control over a corporation to one or several individuals. It is issued to a shareholder and represents the normal rights of any other stockholder, such as receiving quarterly dividends in exchange for their common shares. The only exception, however, is that their right to vote is terminated.
A voting trust certificate expires within two to five years, which at maturity, voting rights are transferred back to the original shareholder.
- Through a voting trust agreement, majority shareholders with voting rights will transfer their right to vote to a trustee in the form of a voting trust certificate. The certificate gives the trustee temporary control of the company.
- Voting trust certificates are used to allow trustees to restructure a company’s finances, counter hostile takeovers, and mitigate any other activity that may damage and result in a detrimental position for the company and its current shareholders.
- The difference between voting trusts and a proxy vote is the amount of power distributed to the trustee and the extended reasons for doing so.
Understanding Voting Trust Certificates
A voting trust certificate provides a small number of individuals with the opportunity to gain control and make strategic decisions for a business with little to no resistance from other parties. In order for a voting trust certificate to be effective, a majority of shareholders must accept the terms for the voting power to be momentarily transferred over.
Generally, a voting trust certificate’s purpose is to allow a group of individuals to restructure the corporation during challenging times, such as overcoming short-term financing plans, strategic hurdles, and more.
Thus, by allowing for the existence of a voting trust certificate, the majority shareholders are implicitly expressing their confidence in the group of trustees to execute and make the necessary changes to reduce any financial struggles that may threaten the goodwill of the company and its shareholders. In other cases, voting trust certificates may be used to countermeasure any possibility of hostile takeovers.
Normally, voting trust certificates are used in smaller firms that struggle with their finances, relative to larger companies that tend to encounter dissimilar problems, considering the latter’s abundance of deployable capital along with a larger float of shares and diversified shareholders.
Recognizing the Terms of a Voting Trust Agreement
Once voting trust agreements are enacted, they must be filed and recorded by the U.S. Securities and Exchange Commission (SEC). Voting trust agreements tend to include:
- The date of the agreement
- Duration of maturity
- The rights of shareholders
- Following procedures in the scenario that a merger occurs
- Consolidation or dissolution of the company
- Stated duties and given powers of the trustees
In addition, compensation is included within the contract for the trustee, which is often stated and agreed upon by the majority shareholders.
Voting Trusts vs. Proxy Voting
Though voting trusts and proxy voting are similar, there are some slight differences in terms of how they operate. For a proxy vote, it is a temporary arrangement for a one-time issue; whereas, for a voting trust, it gives the trustees increased power to make decisions on behalf of all shareholders to control the company, which differs from proxy voting in terms of how much power is allocated.
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