Voting Trusts Strategic Counsel for Shareholder Battles

Voting Trusts and Voting Agreements in Hawai'i

Name: Hopkins Centrich Law
Address: 8701 New Trails, Suite 200, The Woodlands, TX, 77381
Telephone: (254) 249-5436

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.

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

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 meet the following requirements:

The agreements is in writing
A copy is deposited at the principal office of the corporation and is available for inspection by 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 between shareholders regarding shareholder votes. They are illegal between directors and may not be used by shareholders to constrain the exercise of discretion. Also, such agreements may not be enforceable if they constitute the mere buying of votes.

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