A Practical Guide To Voting Trusts
A Practical Guide To Voting Trusts
A Practical Guide To Voting Trusts
Volume 4
Article 4
Issue 2 Spring 1975
1975
Recommended Citation
Woloszyn, John J. (1975) "A Practical Guide to Voting Trusts," University of Baltimore Law Review: Vol. 4: Iss. 2, Article 4.
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A PRACTICAL GUIDE TO VOTING TRUSTS
John J. Woloszynt
2. See, Ringling v. Ringling Bros.-Barnum & Bailey Combined Shows, Inc., 29 Del. Ch. 318,
49 A.2d 603 (1946), modified, 29 Del. Ch. 610, 53 A.2d 441 (Sup. Ct. 1947), for an example
of the problems in enforcing a pooling agreement. The lower court granted, in effect, spe-
cific performance of a stockholders' pooling agreement. The Chancellor found an implied
covenant in the pooling agreement giving the non-breaching party an irrevocable proxy to
cast the votes represented by the shares held by the breaching party. On appeal, however,
the Delaware Supreme Court differed with the Chancellor as to how the agreement should
be enforced. The Supreme Court found no irrevocable proxy to vote the breaching party's
shares. Instead, the court held that the breaching party's votes were to be given no effect.
Thus, the only effective votes cast at the stockholders' meeting in dispute were the votes
of the non-breaching party and those of. the remaining 37% stockholder who was not a
party to the agreement. For a discussion of the enforceability of irrevocable proxies, see
1 O'NEAL §§5.04, 5.11; Comment, Irrevocable Proxies, 43 TEx. L. REV. 733 (1965).
3. H. BALLANTINE, CORPORATIONS §l84 (rev. ed. 1946).
4. For discussions of voting trusts, see generally J. LEAVITT, THE VOTING TRUST (1941);
Ballantine, Voting Trusts, Their Abuses and Regulation, 21, TEX. L. REV. 139 (1942);
Bergerman, Voting Trusts and Non-Voting Stock, 37 YALE L. J. 445 (1928); Burke, Voting
Trusts Currently Observed, 24 MINN. L. REV. 347 (1940); Finkelstein, Voting Trusts
Agreements, 24 MICH. L. REV. 344 (1926); Giles, Is the Voting Trust Agreement a "Dan-
gerous Instrumentality"? 3 CATH. U. L. REV. 81 (1953); Gose, Legal Characteristics
and Consequences of Voting Trusts, 20 WASH. L. REv. 129 (1945); Smith, Limitations on
the Validity of Voting Trusts, 22 COL. L. REV. 627 (1922); Wormser, The Legality of
Corporate Voting Trusts and Pooling Agreements, 18 COL. L. REV. 123 (1918); Note, The
Voting Trust, 34 N.Y.U.L. REV. 290 (1959); Annot., 98 A.L.R. 2d 376 (1964).
5. 66 N.J. Eq. 353, 59 A. 773 (1904).
6. Id. at 364, 59 A. at 781.
7. Id. at 386, 59 A. at 785.
1975] A Practical Guide to Voting Trusts 247
8. See also Bostwick v. Chapman, 60 Conn. 553, 24 A. 32 (1890); Luthy v. Ream, 270 Ill. 170,
llO N.E. 373 (1915); Bridges v. First Nat'l Bank, 152 N.C. 293, 67 S.E. 770 (1910); Harvey
v. Lineville Imp. Co., ll8 N.C. 693, 24 S.E. 489 (1896).
9. See Mackin v. Nicollet Hotel, Inc., 25 F.2d 783 (8th Cir.), cert. denied, 278 U.S. 618 (1928);
Bankers Fire & Marine Ins. Co. v. Sloss, 229 Ala. 26, 155 So. 371 (1934); Bowditch v.
Jackson Co., 76 N.H. 351, 82 A. 1014 (1912); Alderman v. Alderman, 178 S.C. 9, 181 S.E.
897 (1935); Carnegie Trust Co. v. Security Life Ins. Co., 111 Va. 1, 68 S.E. 412 (1910).
10. W. DOUGLAS, DEMOCRACY AND FINANCE 43 (1969).
11. Unless qualified by the special and unusual circumstances of the case, the Com-
mission has opposed the voting trust because it disenfranchises stockholders who
are entitled to a voice in the management of the enterprise.
SEC, Fifteen Annual Report 146 (1948).
12. NYSE COMPANY MANUAL §A15.
13. Except Massachusetts.
14. Citations to the various statutes authorizing voting trusts are collected at ABA-ALI MODEL
Bus. CORP. ACT §34, ~6 (1971); 5A CAVITCH §1l1.01 n.2. I'
15. MD. ANN. CODE art. 23, §45 (1973).
16. 228, Md. 358, 180 A.2d 302 (1962).
248 Baltimore Law Review [Vol. 4
affirmatively express a proper business purpose. In rejecting this conten-
tion, the Court of Appeals held that the Maryland statute does not embody
such a requirement. 17
The question remains, however, what are the permissible and proper
business objectives of a voting trust? One legal commentator has suggested
that, in the absence of a showing of fraud, unfairness, oppression or other
wrong to the stockholders, creditors or the corporation itself, any legitimate
purpose, not in contravention of statutory or charter provisions, is
permissible. IS
Voting trusts are commonly used to retain the existing management of
the corporation. Perpetuation of control, as an end in itself, however, has
been held to be an improper purpose, 19 particularly where the only apparent
reason for the voting trust has been to insure the retention of "lucrative
positions" with the corporation. 20 However, use of the voting trust to insure
stability and continuity of management, especially successful manage-
ment, has been held to be a proper purpose. 21 As might be expected, the line
between these two objectives can at times be extremely tenuous and
subjective. The validity of a particular voting trust often will depend upon
the particular facts surrounding its creation and whether the voting trust
results in fraud upon, or unfairness to, non-participating stockholders and
creditors of the corporation.
Voting trusts frequently have been used by creditors to insure stable and
responsible management during the term of the financial obligation. 22 Such
a purpose has met with judicial approval. 23 Used in this manner, the voting
trust can be more flexible than conventional contract restrictions in
guaranteeing managerial and financial policies approved by the creditors.
However, counsel must bear in mind the fact that directors elected by a
38. For forms of voting trust agreements, see 6 AM. JUR. LEGAL FORMS 2d, §74: 1345·65 (1972);
E. BELSHEIM, MODERN LEGAL FORMS §3012 (1966); NICHOLS CYCLOPEDIA OF LEGAL FORMS
§§9.770-.773r (1963); 6 J. RABKIN & M. JOHNSON, CURRENT LEGAL FORMS WITH TAX
ANALYSIS, Nos. 15.59-.62 (1971).
39. See 5A CAVITCH §1l1.08 n.1.
40. MD. ANN. CODE art. 23, §45 (1973), Comment. See also 1 L. Loss, SECURITIES REGULATION
656 (1961).
41. See Holmes v. Sharretts, 228 Md. 358, 180 A.2d 302 (1962).
252 Baltimore Law Review [Vol. 4
trust would certainly terminate within the 10 year limit.42 Despite the
holding of Holmes, a well drafted agreement should set forth the term of the
voting trust. If the trust is to terminate upon the happening of a certain
contingency, the agreement should provide for termination upon the earlier
of either the happening of the contingency or the 10th anniversary of the
trust.
(4) Renewal or extension of voting trust. Many statutes authorize the
extension or renewal of voting trustS. 43 These statutes generally provide
that, within a certain time before expiration of the original term, or last
extension, anyone or more of the voting trust certificate holders may, by
written agreement, and with the written consent of the voting trustee,
extend the voting trust agreement with respect to the stock subject to their
beneficial interest for an additional term, not to exceed a certain number of
years.44 In addition, these statutes usually provide· that the rights and
obligations of voting trust certificate holders who decline to participate in
an extension are not effected. 45 It is clear that even without specific
statutory authorization, upon termination of a voting trust any of the
parties may participate in a succeeding trust. 46
Of course, any party to the first voting trust has the right to decline to
participate in the succeeding trust. The only benefit of the statutory
authorization is that it abrogates the necessity of formally dissolving the
original trust and creating a new one. An interesting question that arises is
whether a voting trust agreement can provide that, upon the expiration of
the initial term, either a certain percentage of the voting trust certificate
holders or the voting trustee can elect to extend or renew the term of the
trust and thereby bind all parties. It would seem that in jurisdictions having
statutory provisions for renewal, any clause in the agreement in contraven-
tion of the particular statute would be invalid. 47 On the other hand, in
42. 228 Md. 358, 367-68, 180 A.2d 302, 305-06 (1962).
43. See 5A CAVITCH §111.05 [1] n.9.
44. A typical extension provision is:
'At any time within two years prior to the time of expiration of any voting
trust agreement as originally fixed or as last extended as provided in this
subsection, one or more beneficiaries of the trust under the voting trust
agreement may, by written agreement and with the written consent of the
voting trustee or trustees, extend the duration of the voting trust agreement for
an additional period not exceeding ten years from the expiration date of the
trust as originally fixed or as last extended in this subsection. The voting
trustee or trustees shall, prior to the time of expiration of any such voting trust
agreement, as originally fixed or as previously extended, as the case may be, file
in the registered office of the corporation in this State a copy of such extension
agreement and of his or their consent thereto, and thereupon the duration of the
voting trust agreement shall be extended for the period fixed in the extension
agreement; but no such extension agreement shall affect the rights or
obligations of persons not parties thereto.
DEL. CODE ANN. tit. 8, §218(b) (1975).
45. But see OHIO REV. CODE §1701.49(B) (1964), which permits the majority in interest of the
beneficial owners to extend, if the agreement so provides, and makes no provision for
withdrawal by dissenters.
46. Mannheimer v. Keehn, 30 Misc. 584, 41 N.Y.S.2d 542 (Sup. Ct. 1943), modified on other
grounds, 268 App. Div. 845, 51 N.Y.S.2d 750 (1944).
47. Cf. Belle Isle v. Corcoran, 29 Del. Ch. 554, 49 A.2d 1 (Sup. Ct. 1946).
1975] A Practical Guide to Voting Trusts 253
jurisdictions, like Maryland, where there are no specific statutory provisions
governing extension, it seems that the validity of such a clause should
depend upon whether the provision causes the aggregate term of the voting
trust to extend beyond the maximum permitted by statute. 48
(5) Revocation of voting trust. Participating stockholders may wish to
retain the power of termination by providing that a prescribed majority in
interest may terminate the voting trust at any time or upon any other
express condition. 49
(6) Filing copy of voting trust agreement with the corporation. The
agreement should specifically require the voting trustee to file an executed
copy of the voting trust agreement with the corporation at its principal
office.
(7) Transfer of stock to voting trustee; transfer on the corporation's
records. The agreement should set forth the mechanics by which the shares
subject to the agreement are to be assigned to the voting trustee. The
agreement should also authorize the trustee to submit the endorsed stock
certificates to the corporation for cancellation and transfer on the corporate
books, and for issuance of a new certificate in the name of the voting
trustee.
(8) Issuance of voting trust certificates. The voting trust agreement
should also set forth t.he procedure by which the trustee should issue vot.ing
trust certificates, as well as the form and characteristics of such
certificates. 50 It is advisable to attach a specimen certificate to the
agreement as an exhibit, or to set forth in the agreement the complete text
printed on the face of the voting trust certificates.
(9) Transfer of voting trust certificates. The agreement should establish
the method by which voting trust certificates are to be transferrred. The
agreement should also require the voting trustee to maintain a ledger listing
the names and addresses of all voting trust certificate holders and the
number of shares held by each. There should be a provision in the
agreement for inspection of the trustee's records by certificate holders and
other stockholders. The agreement should note any restrictive legends to be
placed on the certificates in compliance with federal and state securities
laws. In addition, if the underlying shares are subject to any charter
provision or stockholder agreement restricting their transferability, such
restrictions should also be legended on the voting trust certificates.
(10) Exchange of voting trust certificate for shares of stock upon
termination of voting trust. A significant aspect of the equitable interest in
the trust is the right, upon the trust's termination, to receive a share of
stock for each share represented by the voting trust certificate. The
agreement should set forth the right and mechanics of accomplishing the
48. But see 1 G. HORNSTEIN, CORPORATION LAw AND PRACTICE §215, at 297 (1959).
49. It should be noted that the California statute permits a majority of the participating
stockholders to revoke the trust at any time despite contrary provisions in the trust
agreement. CAL. CORP. CODE §2231 (West 1954). See also MINN. STAT. ANN. §301.27(1)
(1969), which permits a majority of participating stockholders to revoke unless otherwise
provided in the voting trust agreement.
50. See p. 250 supra with respect to provisions that should be on the voting trusts certificates.
254 Baltimore Law Review [Vol. 4
exchange. The agreement should also address the situation where a
beneficiary is missing or for some other reason fails to surrender the voting
trust certificate. For example, the voting trustee could be given the right to
turn the stock certificate over to the issuing corporation to hold on behalf of
the participating stockholder, thereby relieving the trustee of liability.
(11) Distributions by the corporation. Normally voting trust certificate
holders retain their right to receive dividends in cash or property. However,
the right to receive any distributions will depend on the purpose of the
voting trust. The agreement should specifically address the handling of
liquidating distributions. In addition, any distribution of voting stock
should become subject to the trust.
(12) Successor voting trustees. The voting trust agreement should provide
for successor voting trustees, either by specifically naming the successors or
by providing some method of choosing successors wpen a trustee dies,
resigns, is removed for cause, or is incapacitated or otherwise unable to
act.51 Under normal circumstances, the agreement should also give the
voting trustee the right to resign and indicate the method of resignation.
(13) Casting shareholder votes when there are several voting trustees.
When the agreement appoints two or more trustees to serve concurrently, a
procedure for voting the underlying shares should be established, particu-
larly where the voting trustees are equally divided over an issue. In the
latter case, the vote could be equally divided among the voting trustees, or a
third party, whose decision will bind all of the trustees, could be appointed.
As a third alternative, the agreement could provide that the stock will not
be voted unless there is unanimity among the trustees. This last approach is
dangerous because the corporation might then be controlled by a small
minority of non-participating stockholders. 52 Further, if all of the corpora-
tion's shares are held by the trustees, the corporation as well as the trust
would be deadlocked.
(14) Power of the voting trustee. The voting trust agreement should
delineate the duties and powers of the trustee. 53 In particular, the
51. Several statutes provide that vacancies among the trustees shall be filled by the remaining
trustees unless otherwise provided in the trust agreement. See, e.g., IDAHO CODE ANN.
§30-135(7)(c) (1967); LA. REV. STAT. §12:78(F)(3) (1969); MINN. STAT. ANN. §301.27(3)
(1969); OKLA. STAT. ANN. tit. 18, §1.66(F)(3) (1953).
52. Assuming that, in spite of the trustee's deadlock, they are present at the stockholders'
meeting so that quorum requirements are met.
53. It is important to note that most jurisdictions, including Maryland, view a voting trust as
subject to the law applicable to equitable trusts and the trustee as a trustee in the
equitable sense. Brown v. McLanahan, 148 F.2d 703 (4th Cir. 1945). Therefore, the
trustee's exercise of powers granted under the voting trust agreement is subject to the
obligations an equitable trustee owes to beneficiaries. Cavitch lists the following
obligations as being charged to a voting trustee:
(1) They have a fiduciary oblication to administer for the best interests of all the
beneficiaries or cestuis que trust.
(2) When they represent different classes of shareholders, they may not favor one
class at the expense of another.
(3) Similarly, voting trustees may not exercise their powers to further their own
interests to the detriment of some or all of the beneficiaries.
(4) Voting trustees may alstf have the power and even the duty to protect the in-
1975] A Practical Guide to Voting Trusts 255
agreement should clearly indicate whether the trustee may vote the
underlying shares only on such matters as the election of directors, approval
of auditors and other routine affairs, or whether the trustee's voting rights
extend to more fundamental matters such as mergers, redemptions, sales of
assets, amending the articles of incorporation or by-laws, increasing the
authorized number of shares, creating new classes of stock or dissolving the
corporation. These provisions go to the heart of the voting trust agreement.
Consequently, the courts tend to deny powers asserted by the trustee which
are not clearly and expressly conferred, particularly with respect to the
right to decide upon fundamental changes in corporate structure. 54 The
voting trust statute in one jurisdiction requires that the participating
stockholders reserve the voting power on such fundamental matters, 55 while
most jurisdictions permit assignment of this power to the trustee.
(15) Voting instructions to the voting trustee. Frequently, the agreement
will direct the trustee to vote for certain persons as directors, or in a certain
way ona particular issue. In Maryland, this device may also be used to
insl,lre the election of certain individuals as officers, because officers can be
elected by the stockholders if the by-laws so provide. 56
(16) Compensation of voting trustee; reimbursement for expenses of
trust. The voting trust agreement should indicate whether the voting
trustee is to receive compensation. Most trustees serve without compensa-
tion. The agreement should also establish the trustee's right to reimburse-
ment by the participating stockholders for expenses incurred in administer-
ing the trust. Agreements commonly give the trustee the right to deduct
expenses from any dividends received before redistributing them to the
voting trust certificate holders.
(17) Limitation on personal liability of voting trustee; indemnification.
Voting trust agreements will often attempt to limit the personal liability of
the trustee to the beneficiaries for his votes and other actions. These
exculpatory clauses generally provide that the voting trustee shall not be
liable for any error of law or for any act committed or omitted, except for
willful misconduct or gross negligence. Any attempt to completely exoner-
ate the trustee from liability is generally ineffective on public policy
grounds which will refuse "to relieve the trustee of liability for breach of
trust committed in bad faith or intentionally or with reckless indifference to
tegrity of the trust by defending against a suit to invalidate it when they have
reasonable grounds to believe that the attack is without justification.
1 CAVITCH §11l.06(3) (citations omitted).
54. See, e.g., KuUgren v. Navy Gas and Supply Co., 110 Colo. 454, 135 P.2d 1007 (1943);
Nelson v. Amling, 319 Ill. App. 571, 49 N.E.2d 868 (194;3); Ohio Nat'l Life Ins. Co. v.
Struble, 82 Ohio App. 480, 81 N.E.2d 622, appeal dismissed, 150 Ohio St. 409, 82 N.E.2d
856 (1948),
55. Notwithstanding the provisions of this 'Section ... the holders of record of the
voting trust certificates shall have the same rights as if they were shareholders of
record with respect to voting upon any amendment of the charter, amendment of
the bylaws, reduction of stated capital, sale of the entire assets, merger, consolida-
tion or dissolution ....
N.C. GEN. STAT. §55-72(c) (Supp. 1974).
56. See MD. ANN. CODE art. 23, §60(a) (1973).
256 Baltimore Law Review [Vol. 4
the interests of the beneficiary, or of liability for any profit which the trustee
has derived from a breach of trust." 57 It is also common for the agreement to
provide that the beneficiaries of the trust shall indemnify and hold
harmless the trustee from liability incurred by the trustee in actions brought
by non-participating stockholders.
(18) Trustees as officers and directors; interested transactions; proxies;
trustee's rights to join the trust. There are several miscellaneous matters
which also should be covered by the voting trust agreement. First, there
should be a provision specifying whether the trustee can serve as an officer
or director of the corporation. In addition, it is advisable to specifically
permit the voting trustee or any firm of which he is a member, or any
corporation of which he is a stockholder, director or officer, or any firm,
association or corporation in which he has an interest, to contract with the
corporation or to become pecuniarily interested in any matter or transac-
tion in which the corporation may be involved. Further, agreements will
generally authorize the trustee to vote by proxy, although it seems that
Maryland law would permit the voting trustee to use a proxy even without
specific authorization in the agreement. Finally, the agreement will usually
permit the voting trustee to be a participating stockholder.
(19) Acceptance of the trust. As a matter of formality, the voting trust
agreement usually contains a provision whereby the trust is accepted by the
voting trustee. Such a provision seems to be superfluous because the
execution of the agreement by the trustee evidences his acceptance of the
trust and of his duties.
There are some disadvantages inherent in the use of voting trusts in lieu
of other corporate control devices. A major disadvantage is the fact that a
voting trust will disqualify a corporation as a "small business corporation"
under Subchapter S of the Internal Revenue Code. 58 To qualify for
Subchapter S status, a corporation must not have "as a shareholder a
person (other than an estate) who is not an individual .... "59 The
regulations specifically treat voting trusts as disqualifying shareholders,60
although the position taken by the regulations has been rejected by one
District Court. 61 Another disadvantage in using a voting trust is the 10 year
limitation found in most statutes. There is also the problem of strictly
complying with the technical statutory requirements which must be
satisfied to assure the trust's validity. Finally, there is the disadvantage
of "public disclosure" of the agreement resulting when it is filed with the
corporation. But in spite of these disadvantages, the voting trust is often a
useful and appropriate device for maintaining corporate control. Its