Can a Shareholder Be a Trustee for Other Shareholders?

The legal arrangement in which one shareholder acts as a trustee for another is known as a voting trust. Voting trusts differ from a typical trust in that actual ownership of the shares is not transferred into the trust. Rather, the arrangement is typically used to aggregate voting power.

Voting Trust

When one acquires common shares in a company, those shares typically carry the right to vote on certain significant corporate decisions, such as composition of the board of directors. These voting rights typically adhere to the ownership; when the shareholder transfers the shares, he transfers his voting rights as well. But a voting trust allows the shareholder to separate his ownership rights from his voting rights and transfer the voting rights to another individual, known as a trustee. When multiple shareholders give the trustee their voting rights, it creates a voting trust.

Uses of Trust

Voting trusts can be used for many purposes. Often, shareholders will aggregate their votes through a voting trust in order to acquire greater voting control. However, voting trusts can also be used when the company's creditors want to prevent waste of the company assets; such creditors can ask that voting control be placed with a voting trustee. If a company faces antitrust issues, a voting trust may be established in order to remove control from the company. In family corporations, where the founder has no natural successor, he may decide to place his voting power in the hand of a trustee.

Delaware Law

The Delaware Corporations Code (which acts as the model for many states' laws) authorizes voting trusts and mandates that the agreement establishing the trust be made in writing. Delaware places no automatic time limit on such trusts, but some states do place time limits on the duration of voting trusts. For instance, states that follow the Model Business and Corporations Act will create a 10-year limit (with options to renew) on any voting trust. Changes to the voting trust must also be made in writing.

Secret Voting Trusts

Delaware case law dealing with voting trusts aims to prevent the creation of a "secret voting trust," an arrangement in which parties make a voting trust arrangement without executing the formalities required by Section 218. The case of Abercrombie v. Davies (1957) enumerated several factors to decide whether a voting trust has actually been created. A voting trust is characterized by the separation of actual voting rights from all other aspects of ownership; by the fact that the transfer of voting control is irrevocable; and by the motivation of voting control. If these elements exist in a voting agreement, then it's legally considered a voting trust and must meet the requirements of Section 218.

References

• "Corporations, Other Limited Liability Entities and Partnerships"; Thomas Lee Hazen and Jerry W. Markham; 2008
• U.S. Legal: Voting Trust Law and Legal Definition
• State of Delaware: Delaware Corporations Code, Section 218
• Leagle: Abercrombie v. Davies, Supreme Court of Delaware (1957)