DEFINITION of Voting Trust Certificate
A voting trust certificate is a document issued by a limited-life trust of a corporation established to give temporary voting control of a corporation to one or a few individuals. A voting trust certificate is issued to a stockholder in exchange for his or her common stock, and represents all of the normal rights of a shareholder (e.g., receiving dividends) except the right to vote. The life of a voting trust certificate in many cases ranges from two to five years, at which point the common stock, with voting rights, is returned to the shareholder.
BREAKING DOWN Voting Trust Certificate
A voting trust certificate allows one or a small number of individuals, known as voting trustees, to gain control and make decisions regarding the corporation without interference. A majority of shareholders must accept the voting trust certificates for the voting power arrangement to become effective. The purpose is typically to allow reorganization when a corporation needs to overcome a short-term financial challenge. By handing over control to a group of trustees, a majority of shareholders express confidence that the trustees can more quickly and efficiently execute the changes necessary to rectify a problematic situation that threatens their financial interest in the company. Voting trust certificates are more common among smaller firms than larger ones, as it is easier in terms of administration and practice to issue them to shareholders.
Terms of a Voting Trust Agreement
Voting trust agreements must be filed with the Securities and Exchange Commission (SEC). The legal document will contain, among other terms, the duration of the agreement; the rights of shareholders (other than voting rights); procedures in the event of a merger, consolidation or dissolution of the company; and duties and rights of trustees. Another term in the contract is trustee compensation, which by standard is normally none, unless the majority of shareholders allows for a nominal amount.