What it means
The agreement is the rulebook for the whole arrangement. Shareholders sign it with the trustee, and it is usually filed with the company so it is available to other investors.
Without a clear agreement, there is a risk of disputes about who has the right to do what. It typically names the parties and describes the shares that are being transferred to the trustee.
It states the start date and the term, which may be limited by law. It also records the number of trust certificates to be issued to each participant, one for each share deposited.
Voting instructions form the heart of the document. Some agreements give the trustee freedom to vote as they judge best, others require a majority of certificate holders to approve certain decisions, such as selling the company.
It is common to include limits on what the trustee can do without consent, such as agreeing to a merger. The agreement also covers economics.
It will say how dividends are collected and passed to certificate holders, how expenses and the trustee's fees are paid, and what happens if the company is sold or liquidated. Certificates are normally transferable, which means the economic interest can be sold, but the voting control stays with the trustee.
Exit terms matter just as much as entry terms. The agreement should explain when the trust ends, how the shares will be returned and what happens if the trustee resigns, becomes unable to act, or breaches their duties.
A clause for replacing the trustee is a basic safeguard. Because the agreement shapes control of a company, it should be drafted by a lawyer.
Terms that seem minor, such as the notice needed for a meeting, can matter greatly during a dispute.
In practice
Real-world examples.
Example
Three siblings who inherit a company agree to sign a voting trust agreement that gives a family lawyer authority to vote their combined 70% for five years. The document says that dividends are paid to each sibling in proportion to their certificates. It also allows the trust to end early if all three agree in writing.
Example
An investor putting $5,000,000 into a manufacturer asks the founders to place their shares in a voting trust until the loan is repaid. The agreement lists specific decisions, such as selling major assets, that the trustee cannot approve without the investor's consent.
Example
A holder of trust certificates wants to sell her stake. She checks the agreement and finds that certificates can be transferred only with the trustee's written approval. She also checks that the buyer will be bound by the same terms.
Formula
Calculation
Dividend to each certificate holder = (Certificates held / Total certificates issued) x Total dividend received by the trust
A voting trust holds 800,000 shares, so 800,000 certificates are issued. The company pays a total dividend of $2,000,000 on those shares. A holder with 100,000 certificates owns 100,000 / 800,000 = 12.5% of the trust. Their dividend = 12.5% x $2,000,000 = $250,000, less any trust expenses set out in the agreement. If trust expenses are $16,000 in total, the holder bears 12.5% x $16,000 = $2,000, so the net receipt is $248,000.Case study
Seen in the real world.
Pemberton Textiles is an illustrative, fictional company in which two founding families held 62% of the shares. After years of disagreement, a bank agreed to a $10,000,000 refinancing only if the families signed a voting trust agreement.
The agreement named an independent accountant as trustee, set a five-year term, and listed reserved matters on which the trustee needed written consent from both families. It also described how dividends would be paid and what would happen if the trustee resigned.
Early in the term, a disagreement arose about whether to approve a new factory. Because the agreement set out a clear decision process, the issue was resolved within two weeks and without a court case. The fictional example shows that careful drafting reduces the risk that the trust itself becomes a source of conflict.
Watch out
Common mistakes.
- Signing an agreement without understanding the term and the exit rights, which can lock shares in the trust for longer than expected.
- Leaving the trustee's powers vague, which invites disputes over what the trustee may decide alone.
- Forgetting to ask for a copy of the agreement when investing in a company, even though it affects who controls votes.
Questions
People also ask.
What must a voting trust agreement include?
It should name the trustee, the shares covered, the term, the voting rules, dividend arrangements and how the trust ends.
Can certificates be sold?
Usually yes, though the agreement may restrict transfers or require approval, so the document should be checked.
Does the company have to be told?
In many places the agreement must be filed with the company and made available to shareholders, depending on local law.
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