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Voting Trust

Definition

A voting trust is a legal agreement where shareholders transfer their shares to a trust, granting the trustee control over the company’s voting rights. The shareholders are still entitled to dividends and other financial benefits. This arrangement is typically used to consolidate control, prevent hostile takeovers, or carry out specific objectives.

Phonetic

The phonetics of the keyword “Voting Trust” is: /ˈvōdiNG trəst/

Key Takeaways

  1. Control or Decision making: A Voting Trust is a legal arrangement which enables the shareholders of a corporation to pool their voting interest in order to gain control or bring consistency in decision making. It helps shareholders to vote together, thereby amplifying their influence over the company’s affairs.
  2. Trust Duration: The duration of a voting trust is typically limited by law. In most jurisdictions, it cannot exceed a certain number of years. After this period, the voting rights will revert back to the original shareholders. However, the duration can often be extended if agreed upon by the trustees and shareholders.
  3. Trust Agreement: All the terms and conditions governing the voting trust are specified in a Trust Agreement. This comprises the details such as the names of the trustees, duration of the trust, rights and obligations of the trustees and the shareholders, and the ways in which voting rights are to be exercised by the trustees.

Importance

A voting trust is significant in the business and finance realm as it provides a solution to manage the voting rights of a corporation’s stock. When stockholders transfer their shares to a voting trustee, they gain an increased degree of control and guarantee that they vote unanimously on corporate matters. This can ensure an agreed-upon direction for the corporation, preventing leadership conflicts that could jeopardize its stability or growth. Therefore, voting trusts play an integral role in corporate governance, facilitating key decisions, enabling strategic planning, and minimizing the potential for internal strife.

Explanation

A voting trust serves an essential purpose in finance and business, particularly in corporate governance. It is designed to consolidate and centralize control over a corporation, which is particularly beneficial when the corporation’s shares are widely dispersed among many shareholders. A voting trust agreement allows shareholders to transfer their voting rights to a voting trustee, who then has the authority to vote on corporate matters. This method ensures a unified course of action and direction for the company and prevents the potential discord that could arise from various shareholders having differing interests and views.The use of a voting trust can also provide temporary control of a company to a specific group or individual. This is especially pertinent in situations such as succession planning, business turnaround, or hostile takeovers. The party assuming control or the trustee usually has a set agenda or purpose that must be achieved within the period of the trust. After this time, voting rights would typically revert back to the original shareholders. This tool, hence, provides a form of stability and direction, making it a practical mechanism in managing corporate affairs.

Examples

1. CBS Corporation Voting Trust Agreement: In 2016, Shari Redstone, President of National Amusements, the media company that holds the controlling stake in CBS Corporation, signed a Voting Trust Agreement to maintain the family’s control over the corporation until the death of its patriarch, Sumner M. Redstone. This allowed the family to retain control of the company regardless of fluctuations in their actual ownership stake.2. Ford Motor Company Voting Trust: The Ford family maintained control of Ford Motors through a dual class stock structure and a voting trust, which was originally established in 1956. The family’s Class B shares represent less than 2% of total equity but retain 40% of total voting power. 3. Hershey Trust Company: The Hershey Trust Company controls a large voting block of the Hershey Company’s common stock. The Trust was established by Milton S. Hershey in 1905 for the benefit of Hershey’s community and the Milton Hershey School. Despite numerous attempts to acquire the company over the years, the trust has held onto the majority of the voting power, allowing it to effectively control the company.

Frequently Asked Questions(FAQ)

What is a Voting Trust?

A voting trust is a legal agreement whereby the shares of a company are transferred to a trustee, typically for a specified period. The trustee is then responsible for voting on company matters.

How does a Voting Trust operate?

The person who transfers the shares (trustor) gives the trustee the authority to vote on their behalf for a specified period. The trustee, who must vote in the best interests of the shareholder, carries the voting rights of the stocks.

What is the purpose of a Voting Trust?

The main purpose of a voting trust is to consolidate voting power. This happens when stockholders with a significant number of shares want to avoid voting deadlock or ensure continuity in management.

Who can set up a Voting Trust?

Any stockholder with voting rights can set up a voting trust. Usually, shareholders with broad influence or interest in the decision-making process of a company use voting trusts.

What is included in a Voting Trust Agreement?

A voting trust agreement includes information such as the names of the trustor and trustee, number of shares involved, length of the trust, conditions for the trustee to vote, and other details depending on the specific needs of the trustor.

Can a Voting Trust agreement be terminated?

Yes, based on the terms and conditions specified in the voting trust agreement, the agreement may be terminated. This usually happens when the specified time period expires or when the conditions of termination, as defined in the agreement, are met.

Are Voting Trusts legal in all jurisdictions?

The legality and rules governing voting trusts may differ from one jurisdiction to the next. It’s recommended that one consults with an expert on corporate governance or a legal professional in their specific jurisdiction.

What are the general restrictions on Voting Trusts?

Every jurisdiction may have different restrictions, but commonly, a voting trust must not give someone limitless control over a corporation, the trustor still maintains some rights over the shares, and the length of the trust may also be limited.

Related Finance Terms

  • Trustee: The person or entity that holds shares on behalf of the voting trust.
  • Beneficiaries: The original owners of the shares who transferred them to the voting trust.
  • Voting Rights: The ability to vote on corporate matters, which is transferred to the trustee under a voting trust arrangement.
  • Trust Agreement: The legal document establishing the voting trust and outlining its terms and conditions.
  • Corporate Governance: The system of rules, practices, and processes that guide a company and which can be influenced by a voting trust through its pooling of voting power.

Sources for More Information

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