What it means
Ordinary shareholders each cast their own votes, which can make decisions unpredictable when ownership is spread among many parties. In a voting trust, a group of shareholders hands over their shares to a trustee, who holds the legal title and votes them.
The shareholders get certificates in return, which show that they still own the economic benefit of the shares. The reasons for setting one up are practical.
A company recovering from financial trouble may want a stable board, a family business may want to keep voting power together so that disagreement among relatives does not cause a split, and lenders or investors may require it as a condition of funding. The trustee has a duty to vote in line with the trust agreement and to act in good faith.
In some cases the trust gives the trustee broad discretion, and in others it gives precise instructions. The trustee generally does not own the shares for their own benefit, and passes any dividends on to the certificate holders.
The key feature is the separation of control from economic ownership. Certificate holders still share in profits and still have a claim if the company is wound up, but they cannot vote directly during the life of the trust.
At the end of the term the shares usually go back to the holders, unless the trust is extended. Rules vary by jurisdiction.
Many places limit the maximum length of a voting trust, require that the agreement be filed with the company or a public registry, and allow shareholders to inspect it. Failure to follow these rules can make the trust invalid.
For anyone investing in or advising a company with such an arrangement, the point is that the headline shareholding may not show who truly controls decisions. Always check whether any shares are held in a voting trust before assuming that the largest holder decides.
In practice
Real-world examples.
Example
A family-owned manufacturer has twelve relatives holding shares. To stop disputes between branches of the family, they place their voting rights in a trust run by a trusted adviser. The adviser votes as a single block, and each relative still receives dividends.
Example
A lender agrees to refinance a struggling retailer on condition that the major shareholders put their voting shares in a trust for three years. The trustee is a restructuring professional who supports the turnaround plan. The lender gains comfort that the board will not change abruptly.
Example
A group of minority investors in a start-up pool their votes in a trust so that they can influence board appointments. Together they hold 35% of the votes and negotiate seats that none of them could have won alone.
Formula
Calculation
Combined voting power = Shares deposited in the trust / Total shares entitled to vote x 100
A company has 1,000,000 voting shares in issue. Three shareholders deposit 150,000, 200,000 and 250,000 shares into a voting trust. Total deposited = 150,000 + 200,000 + 250,000 = 600,000 shares. Combined voting power = 600,000 / 1,000,000 x 100 = 60%. The trustee therefore controls a majority of votes, even though none of the three individuals held more than 25% on their own.Case study
Seen in the real world.
Dunmore Tools is an illustrative, fictional listed company that nearly collapsed after a failed expansion. Its largest shareholders were divided about whether to replace management, and the lenders wanted stability before extending a new $15,000,000 loan.
Five shareholders holding 55% of the voting shares agreed to deposit them in a voting trust for four years. A professional trustee was appointed to vote the shares in support of the recovery plan, and the holders kept their right to dividends.
The loan was approved, and the company stabilised under a steady board. The fictional shareholders did give up their individual voice, and some complained when the trust blocked a proposed takeover they would have welcomed. The agreement ended on schedule and the shares returned to their owners. The board noted afterwards that the trust had done its job of buying time, and that the company's lenders had been reassured by the clarity of the arrangement. Management also published a short summary of the trust terms in its annual report so that new investors understood who controlled the votes.
Watch out
Common mistakes.
- Assuming that depositing shares in a voting trust gives up ownership, when holders keep the economic benefits through certificates.
- Overlooking that the trust may limit the freedom to sell, since certificates may be subject to transfer restrictions.
- Judging who controls a company from the share register alone, without checking for voting trusts.
Questions
People also ask.
Who votes the shares?
The trustee votes them, following the terms of the trust agreement.
Do holders still get dividends?
Yes, the trustee passes dividends to the holders of the trust certificates, normally in proportion to their holdings.
How long can a voting trust last?
It depends on local law, which often sets a maximum term, though many trusts can be renewed by agreement.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related