By Robert Wenzel
After accepting outside capital for your company, shareholders may want to have an agreement that dictates who will run the business. This type of decision is often known as a voting agreement and can take many different forms.
One type of voting agreement is a voting trust, which is when some of the shareholders decide to give voting authority for their shares to an outside, third party trustee. The voting trust is also in writing and the shares are transferred to the trust in exchange for the interest in the trust proceeds.
A voting trust has several benefits. First, the investor can transfer their shares and in return receive an interest in any proceeds in proportion to the number of shares that the person transfers into the voting agreement. This allows the individual providing capital to still earn a return on their investment while having a neutral or outside third party make the decisions on voting for the trust.
The drawback to a voting trust is that the investors do not have a direct say in the decisions of the shares. This could potentially lead to individuals either not providing capital or doing so with stipulations, such as a larger return on their investment.
A second type of voting agreement involves an agreement where all investors vote their shares in a particular way. This type of agreement also allows for all investors to agree to and follow the agreement.
Voting agreements can provide beneficial to the partnership. It forces all the shareholders to keep the best interests of the company in mind when voting on specific items and issues. In addition, when one party votes against the other individuals, the voting agreement allows for any investor to sue for performance against the individual who cast the dissenting vote.
One drawback to a voting agreement is that it does not allow for flexibility. Rather, it requires all the parties to vote in a specific way without the choice to dissent. If and when a situation arises that calls for change, it will be very difficult to adjust the agreement accordingly.
A final type of arrangement is a management agreement, which is a type of contract that dictates how the company will be governed. This type of compact allows the investors to dictate certain things about the company, such as how or when dividends will be paid to shareholders; who the organizational officers or directors are; and what powers will be granted to the board of directors.
The management agreement can be amended either by all of the current company shareholders or by any terms that may be in the agreement at the time of adoption.
A management agreement allows the investors to know what to expect out of the individuals who will be running the company. In addition, the individual providing capital can get an idea of what they can receive as a return on their investment as well as the frequency of these payments.
Furthermore, providing the opportunity to modify the terms gives the company and executives flexibility. It can allow the board of directors or the partners to make any necessary changes that they did not originally anticipate, such as any economic changes or variations to the business needs.
Ultimately, the company needs to evaluate their situation and determine which type of voting agreement best suits their business needs. Another factor to consider is how many investors the business has and what (if any) liability could be incurred from each type of arrangement. If there are a small number of investors, one option may be better than another if the organization in question has a large number of individuals providing capital. Once the decision has been made, it is important to clearly state what the voting agreement is so that everyone is aware of the policy. Doing so can avoid any future negative consequences.
The information provided above should not be construed as legal advice. Only a licensed and qualified business attorney who knows the specifics of your situation can provide a helpful recommendation.