Pooling Agreement Definition
A share of stock in a company grants the shareholder the right to receive dividends and to vote on shareholders' resolutions. A pooling agreement, also known as a voting trust, is a contract whereby shareholders agree to transfer their voting rights to a trustee. Pooling agreements are often used to combine the voting power of several shareholders in order to maximize the trustee's influence on corporate affairs.
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Legal Relationship
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In some states, when two or more shareholders, known as beneficiaries, appoint a trustee the voting rights on their shares that enable them to vote at shareholders' meetings, new share certificates are issued in the name of the trustee. The maximum period of a pooling agreement is set by state law (five years in New Jersey, for example), and after the period expires, the voting rights are returned to the beneficiaries.
Jurisdictions
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Pooling agreements were first popularized in Delaware. Since then, several states have proceeded to authorize them. A number of offshore jurisdictions also authorize pooling agreements.
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Corporate Reorganization
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Large corporate reorganizations, which are subject to bankruptcies, are often administered by large banking syndicates. These syndicates often do not own enough shares in the company to be able to control its management through appointing directors and executives, but wish it ensure the company's future stability. The syndicates use pooling agreements to control the management of the company, and thereby control company policy for the first few years after the reorganization.
Prevention of Hostile Takeovers
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In a hostile takeover, a party that is adverse to the current management of a company will offer shareholders a premium price in order to purchase enough voting shares in the company to dismiss the management. Pooling agreements are used by corporate directors and executives, naming themselves or their representatives as trustees, to prevent a hostile party from gaining control over the company.
Preferred Shareholders
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Preferred shareholders are generally granted the right to first priority in the distribution of dividends, and are often given higher rates. In exchange for these privileges, they give up voting rights. If the company defaults on these dividends, however, the shareholders have no voting power to contest the default. A pooling agreement with nonpreferred shareholders can guard against this risk by giving preferred shareholders the right to vote the shares of nonpreferred shareholders.
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