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Voting Trusts and Voting Agreements

Shareholder agreements modifying voting rights and creating voting trusts.

voting trusts and similar agreements

Controlling the Corporation and Preventing Oppression Through Voting Trusts and Similar Agreements

Shareholders have a fundamental right to vote, which cannot be impaired or infringed upon by thecorporation or those in control. However, the law does permit a shareholder to limit or modify his voting rights by agreement.

Voting Trusts

A shareholder may assign his right to vote to another person by means of a voting trust agreement. A voting trust is created by a written trust agreement whereby the original stockholder transfers his shares to a trustee to be held for his benefit. The purpose of such arrangements is to control the voting of the shares and to empower the trustee to vote the shares. The original stockholder retains a beneficial interest in the stock, and usually the trust agreement requires all dividends and distributions to be paid to the equitable owners. Voting trust agreements may require the trustee to vote in certain ways on certain matters. Section 6.251 of the Business Organizations Code provides:

  • The voting trust agreement must be in writing and confer the right to vote on the trustee.
  • The stock must be transferred into the name of the trustee.
  • A copy of the voting trust agreement must be deposited with the corporation and made available for shareholder inspection.

Voting trusts may be used to lock in a majority block by combining the voting strength of several minority shareholders. It can also be used by minority shareholders to increase the power of their representation. Sometimes, the voting trust can be a tool of oppression, where a controlling shareholder persuades other minority shareholders to grant them the power of their votes (typically, shareholders not involved or much interested in the business, such as children or grandchildren who inherited their stock in the venture) and then uses that power to vote their shares against their best interests. However, where the trust agreement gives the trustee unbridled discretion over the vote, then the trustee is still a trustee and owes fiduciary duties to the equitable owner, including presumably the duty to vote the stock in the best interests of the equitable owner and not to personally benefit from the voting power.

Shareholder Voting Rights Agreements

Shareholders may also contract among themselves to vote in a certain way on specific matters—i.e., to vote as a block. Such an agreement may sometimes allow a group of shareholders to obtain or maintain control, particularly where cumulative voting is permitted. Voting rights agreements differ from voting trusts in that the stockholder remains the stockholder of record, and there is no trust. Section 6.252 of the Business Organizations Code provides that such agreements are enforceable if they are meet the following requirements:

  • The agreement is in writing.
  • A copy is deposited at the principal office of the corporation and is available for inspection to all shareholders.

The agreement should be conspicuously noted on the certificate; otherwise, the agreement will not be enforceable against a transferee for value who buys the stock without knowledge of the agreement. Someone who receives the stock by gift or inheritance, however, is bound by the agreement once he acquires actual knowledge of it. It is important to note that these voting rights agreements are valid only as between shareholders regarding shareholder votes. They are illegal as between directors, and may not be used by shareholders to constrain the exercise of discretion by directors. Also, such agreements may not be enforceable if they constitute mere buying of votes.

Irrevocable Proxies

Voting rights agreements may also involve the granting of a proxy to another party to actually exercise the vote. This arrangement is somewhere between the voting trust and the voting agreement—the stockholder remains the stockholder or record, but the right to vote the stock is conferred on another. Section 21.367 of the Code provides that a shareholder may vote in person or by written proxy given to another person. A proxy is
 only valid for 11 months, unless otherwise provided in the instrument. A proxy is not irrevocable unless (1) the proxy form conspicuously states that it is irrevocable, and (2) the proxy is “coupled with an interest”—meaning that the reason for the proxy is not merely delegation of the voting power but that the proxy holder has an interest in the shares, such as a pledgee who is holding the shares as collateral and is entitled to vote the shares by proxy until the debt is paid.

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

 

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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