What Is a Voting Trust Agreement?

First of all, what does voting trust mean? By definition, this is created to combine the power of voting of the shareholders by temporarily giving their shares to an established trustee. By creating a voting trust, the company shareholders then acquire certificates that state that they are beneficiaries of the said trust being created, with a condition that their shares must be given to the trustee. They are usually the same as proxy voting in the sense that the shareholders assign voting duties to another party. During a voting trust, the trustee is then required to vote in favor of the wishes of the participating shareholders.

A voting trust agreement is a business document that also serves as a legally binding contract that documents the transfer of shares from a shareholder to a trustee. The arrangement grants the trustee temporary authority over the shareholders’ voting rights. Voting trusts are then managed by the company’s present directors to prevent other parties from taking control over the company without any of the directors’ knowledge. Shareholders most typically employ a voting trust agreement to establish uniform voting blocks.

Different Parts of a Voting Trust Agreement

Listed and discussed below are the different parts that need to be present when a voting trust agreement is drafted:

Definitions. This part of the agreement document defines all the keywords that are present in the document (usually the more complex and legalese ones). This section is added to ensure that anyone who may be reading it will understand the terms in the manner being presented and as intended by the writer since the readers may have their own interpretation of the words or they may not totally understand them at all. This is also useful in any disputes.Creation and Termination of Trust. This part of the voting trust agreement states the date on which the agreement begins to take effect and its intended date of termination. This part also states that the agreement should be irrevocable within that timeframe, and at any given time within the duration of the agreement, one or more beneficiaries of the agreement may extend the duration for a specific period with the consent of the voting trustee or trustees.Delivery of Shares and Certificates. This part of the agreement states that each of the beneficiaries of the voting trust agreement will deliver all certificates of shares that are owned by the company after the effective start date of the agreement and before the termination date of the agreement. This article also states that the trustees agree to issue and deliver a voting trust certificate to the beneficiaries that serve as evidence that the shares have been received by them.Trustee’s Powers and Rights. This part of the voting trust agreement states that the trustees will now possess certain powers and rights as the beneficiaries hand over their shares to them. Examples of the rights that they will now possess include the right to vote in person or through a proxy, the right to participate in ratifying any corporate action, and so on. It also states that the trustees do not have the right or authority to sell or dispose of any of the shares that were entrusted to them by the beneficiaries of the agreement.Dividends. This clause states that the trustees should distribute cash payments to the beneficiaries that are equivalent to the cash dividends received by the trustees as part of them receiving the shares given to them which initiated the issuance of the voting trust certificate.Administration of Trust Agreement. This part of the document states the methods or regulations in which the trust agreement is to be administered. In doing so, the trustees should keep a database of the holders of the voting trust certificates, should give any notice to the holders of the voting trust certificate, and are authorized to pay the expenses that are necessary to the agreement. The beneficiaries must also designate a successor should any vacancy arise in the trustees for any reason. This part also states that the agreement document should be governed by the laws of the place in which the said agreement was created.Inspection of Agreement. This part states that a duplicate and any extension of the voting trust agreement should be filed by the secretary of the trustee corporation and must be readily available for inspection by a stockholder or someone who is a registered holder of a voting trust certificate.Indemnity Clause. This clause of the voting trust agreement states that the trustees should be completely indemnified against all costs, charges, liabilities, etc. incurred by them in the exercise of any power that is conferred by them throughout the agreement.Additional Trustees. This section of the agreement states that, from time to time, the voting trustees, with written consent from the corporation, be able to add one or more trustees to the agreement. This part also states that all the additional trustees that are appointed shall be immediately endowed with all the rights, property, authority, and powers that the incumbent trustees currently possess.Severability Clause. This explicitly states that if any part of the voting trust agreement is invalid, the remaining parts of the document shall remain valid as though the invalid parts didn’t exist in the first place.Assignment ClauseThis states that the voting trust agreement should have legal effects on the main parties involved, as well as their heirs, legal representatives, administrators, successors. and assigns.Signatures. The last main bit of the document, this part contains the date that the signatures are affixed, as well as the names and signatures of all the trustees involved, the names and signatures of the beneficiaries of the agreement, and the number of shares that the beneficiaries currently own.

Different Purposes of a Voting Trust

Here are some of the reasons why a voting trust exists:

Steps/Process in a Company Takeover

A voting trust agreement is a document that is usually needed to prevent a hostile takeover of a company and to safeguard its control. But what is usually the process involved in normally taking over a company (also known as a friendly takeover)? Here are those listed below:

  • 1. Determining the Market

    This is the first step to be followed when a company takeover is to be planned. In this step, the leaders usually begin the process of acquisition by establishing and analyzing the appropriate market for purchase. The suitable market in terms of growth potential in the market serviced, company, or service given is analyzed and graded based on available opportunities. This stage often collects data about the client’s origin, population, market employment rate, alternative sources for the product, competitive pricing, and customer preferences.

  • 2. Candidate Identification

    After determining the target market and subsequently analyzing it, this step will then follow in a company takeover. In this step, the appropriate candidates for the company takeover are then selected. This step entails a comprehensive review of possible candidates who might fulfill an acquirer’s appropriate strategic and financial growth objectives. This entails identifying potential possibilities and prospects that exist both within and outside of the sector. This procedure is focused on management research, experiences, consultation, and other similar approaches.

  • 3. Evaluating the Financial Position

    After identifying the suitable candidates for the company takeover and selecting the best possible one, this step will then follow. The third step that occurs during the company takeover process is a thorough examination of the target company’s volume, revenue, cost, and balance sheet. The target company’s financial and credit condition is also reviewed at this stage based on the financial projection.

  • 4. Decision Making

    Once the evaluation process of the target company’s financial position has been completed, this step will then follow. In this step, the purchaser who plans to take over the company must weigh the benefits and drawbacks of the company acquisition. Depending on the evaluation report, checklist of questions, or questionnaires, they must assess the anticipated advantages and cons of the proposed purchase. A thorough examination is used to make a high-quality judgment. Leaders examine the strategic value addition for a merged firm following the acquisition.

  • 5. Value Assessment

    After weighing the advantages and disadvantages of the company takeover and subsequently deciding whether to proceed to not, then this step then happens. In this phase, it is critical to assess the target company’s financial worth. Concurrently, the options for arranging and funding the takeover are explored. In this step, the framework that best meets the financial and development objectives of obtaining a company is chosen. Valuation is the most essential step of the company takeover process because if it goes wrong, it may derail the entire acquisition decision. This may be accomplished using the discounted cash flow approach or the comparable transaction method.

  • 6. Due-Diligence Process and Takeover

    After the value assessment is completed, this step then happens. In this stage, the executives of the acquirer firm begin the comprehensive due-diligence process of the target company in order to gain a clear image of the target company. In this manner, they may be confident in their decision to invest in the company. Following that, the takeover procedure is carried out. A successful acquisition is uniting two businesses in order to maximize strategic and financial benefits while avoiding disruptions and restrictions in both entities’ current operations.


What is a hostile takeover?

A hostile takeover is referred to as the takeover of a target firm by another corporation, which is also known as the acquirer company, by a direct approach to the target company’s shareholders, either through a tender offer or a proxy vote. The key distinction between a hostile and a friendly takeover would be that the target company’s board of directors does not approve of the transaction in a hostile takeover.

What is a voting trust certificate?

A voting trust certificate is a business document that is granted to a shareholder in return for the shareholder transferring shares to one or more trustees. By receiving this certificate, the shareholder agrees to delegate provisional control of their rights and powers to a voting trustee in order for the company to make decisions without interference. The voting trust certificate is valid for the duration of the voting trust term, after which the assets are restored to the equitable owners.

How do you defend against a hostile takeover?

Aside from using a voting trust agreement as a deterrent against a hostile takeover, one way of defending against is by using a poison pill. The process of using a poison pill is by making the target company’s stock less appealing by permitting current shareholders to acquire additional shares at a lower cost. This will diminish the equity interest that is indicated by each share and, as a result, raise the number of shares required by the acquiring business to gain a controlling position. The goal is that by making the purchase more difficult and costly, the would-be acquirer will quit their bid.

As stated earlier, voting trust agreements are documents that are used to allow the shareholders to transfer their voting rights to a trustee, which in turn effectively gives the trustees temporary control of the beneficiary corporation. Writing this document may be a daunting task since this is a legal business document and many things can go wrong if done poorly. In this article, there are plenty of sample templates of this type of document that are readily available for you to have a look at in order for you to get familiarized with what this document really is.