MSTR Cat

Trust Law/Level VII · Property and business/7.2 Business/Lesson 5

Voting trusts

How shareholders pool their votes by transferring shares to a trustee, what Delaware law and the Model Business Corporation Act say about it, and how voting trusts fit the S corporation rules.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest way to pool votes is often a signed written voting agreement among stockholders under Delaware’s §218(c), which requires no transfer of shares to a trustee and no trust certificates.
  2. Separate control from income without any trust by issuing voting and non-voting common shares; an S corporation may do so because differences in voting rights do not create a second class of stock (IRC §1361(c)(4)).
  3. If a voting trust is used in Delaware, the agreement may set its own term, and a copy must sit at the registered office or principal place of business, open to inspection by stockholders and beneficiaries.
  4. For S corporation stock, the voting trust must meet Treas. Reg. §1.1361-1(h)(1)(v): grantor-trust beneficiaries, distributions passed through, shares returned and a fixed end date; each beneficiary counts toward the 100-shareholder limit.
  5. Massachusetts’ filing rules for trusts with transferable shares (G.L. c.182) exclude trusts set up solely to exercise voting rights; check your own state’s corporation statute for any remaining term limit.

MaterialsDelaware General Corporation Law §218, free on delcode.delaware.govThe voting trust section of the corporation statute in the state where a company you are studying is incorporated26 U.S.C. §1361(c)(2), on trusts that may hold S corporation stock, free on law.cornell.eduLesson 1.1.5, on legal title and beneficial ownership, and lesson 7.2.7, on trusts that hold operating companies

Wonder

  1. Why would shareholders give up their right to vote but keep their right to dividends?
  2. How long can a voting trust last, and who decides?
  3. Can a company that has elected S corporation status have a voting trust as a shareholder?

Explore

  1. A voting trust is a written agreement under which one or more shareholders transfer their shares to a trustee, who becomes the holder of record and gains the right to vote them for a period set by the agreement. The original shareholders become beneficiaries. They usually receive voting trust certificates, which record their beneficial interest, and they keep the economic rights, such as dividends. A voting trust differs from a proxy, which only authorises someone to vote shares that the shareholder still holds.
  2. The main effect is to concentrate voting power. Shares that would otherwise be voted by many holders are voted as one block by the trustee, following the instructions or standards in the agreement. This can keep a group’s control steady and stop individual holders from voting in different directions. The agreement defines the trustee’s powers, how long the arrangement lasts, and what happens to dividends and to the shares when it ends.
  3. Voting trusts have been used in family companies, to keep voting control with one person or branch while income goes to all owners; in reorganisations, where creditors or new investors want stable management for a time; and in regulated industries, where an owner may place shares with an independent trustee so that it does not exercise control a regulator would object to. Whether an arrangement achieves its aim depends on the agreement, the statute and, in regulatory cases, the regulator’s view.
  4. The rules come from the state of incorporation. Delaware General Corporation Law §218 lets one or more stockholders transfer stock to a voting trustee for ‘any period of time determined by such agreement’. A copy of the agreement must be delivered to the corporation’s registered office in Delaware or its principal place of business, where any stockholder or trust beneficiary may inspect it, and new stock is issued to the trustee. In voting, the trustee is not responsible as a stockholder or trustee except for its own ‘individual malfeasance’. Amendments must also be in writing.
  5. Older corporation statutes commonly limited voting trusts to 10 years, with a possible extension. Delaware’s current §218 sets no fixed limit, and the current Model Business Corporation Act (§7.30) leaves any limit on duration to the voting trust itself. Some states have adopted that approach, sometimes keeping the old limit for trusts created before the change, while others still set a maximum term. The statute in force in the state of incorporation is the authority for a particular company.
  6. US federal tax law adds its own rule for S corporations. Under IRC §1361(c)(2)(A)(iv), ‘a trust created primarily to exercise the voting power of stock transferred to it’ may be a shareholder, and under §1361(c)(2)(B)(iv) each beneficiary is treated as a shareholder, so each must be an eligible shareholder and counts toward the 100-shareholder limit. Treasury Regulation §1.1361-1(h)(1)(v) adds conditions: the beneficiaries must be treated as owners of their portions under the grantor trust rules, and the written agreement must pass distributions to them, return the shares to them at the end, and end on or before a specific date or event.

Key facts

  • In a voting trust, shareholders transfer shares to a trustee who votes them under a written agreement; the original holders keep the beneficial interest, usually shown by voting trust certificates.
  • A proxy only authorises someone to vote shares the shareholder still holds; a voting trust transfers the shares to the trustee.
  • Delaware General Corporation Law §218 lets the agreement set the voting trust’s term and requires a copy at the corporation’s registered office or principal place of business, open to inspection.
  • Older statutes often capped voting trusts at 10 years; Delaware’s current law and the current Model Business Corporation Act (§7.30) leave the term to the agreement, but some states still set limits.
  • Under IRC §1361(c)(2)(A)(iv), a voting trust may hold S corporation stock, and each beneficiary is treated as a shareholder (§1361(c)(2)(B)(iv)).
  • Treasury Regulation §1.1361-1(h)(1)(v) requires a qualifying voting trust to have a written agreement and to end on or before a specific date or event.

Exercise nine, six, three, one

9CollectList up to 9 terms of a voting trust agreement described in a case study, a public filing or an article you are reading (some have fewer), such as who the trustee is, how long it lasts, how votes are decided, what happens to dividends and what happens at the end.
6ClusterSort them into 6 categories: the parties, the trustee’s voting powers, duration and ending, dividends and other economic rights, filing and inspection, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: terms that shift control, terms that protect the beneficiaries’ economic interest, and terms set or limited by statute.
1CrystallizeWrite 1 sentence explaining, in your own words, how a voting trust separates the right to vote shares from the right to their economic benefits.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS