This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The "voting trust" has been growing in favor during recent years. It has already been mentioned that at one time, a generation or more ago, the favorite form of combination among competing concerns was a body of trustees to whom controlling shares in the competing corporations were turned over - an arrangement found to be in restraint of trade and therefore illegal. The plan herein referred to is different, in that it is confined to one company and its sole purpose is to secure continuity of management and policy within that company.
The laws of most states which authorize the formation of a voting trust require that it shall be open to all shareholders who wish to take part in it. Without this provision it might become a dangerous device for concentrating control. In fact, even with this restriction there is reason to think that the voting trust has sometimes been used rather for the benefit of the trustees than for the benefit of the corporation.
The chief use - and a legitimate use - of the voting trust, however, is to protect the shareholders and others who take part in a reorganization. Ordinarily, as we shall see later on, a reorganization is carried through by a banking syndicate, headed by some powerful banking firm. Naturally the firm, in order to protect its own reputation and the people to whom it has sold the securities of the reorganized company, wishes to make sure that there will be sound management over a period of years. Yet it is not in control and perhaps holds very little of the company's stock. In order to meet this situation, it is frequently required that a majority of the voting stock be lodged with trustees under a voting trust agreement. Stuart Daggett states that out of seven railroad reorganizations, during the period 1893-1898, five included voting trusts and one a proxy committee in the reorganization plans.
A similar use of the same plan is the establishment of a voting trust representing the preferred shareholders when there has been default in payment of the preferred dividends. Under the laws of New Jersey, a voting trust cannot continue for longer than five years, and other states have imposed similar limitations. Ordinarily, the trustees have an option to terminate the arrangement at their discretion. When the Northern Pacific voting trust was dissolved in 1901, the trustees explained the dissolution: "by reason of the evidence of financial strength, conservative management, skilful and profitable operation, superior physical condition of the property and reasonable prospect of continued prosperity."*
Still another use of the voting trust is to prevent the control from passing into the hands of interests that are not regarded favorably by the management of the corporation. When the American Glucose Company was formed, in 1894, the vice-president of the company controlled a clear majority of the stock, but it was agreed, nevertheless, that the active management should be in the hands of the president. An agreement was therefore signed "to place in the hands of trustees, to be named by the President, 2,544 shares of said preferred stock, upon the trust that in the election of the directors and officers of said company, and upon other matters arising at stockholders' meetings, said trustees shall vote thereon as requested by said President." The addition of the trustees' stock to the president's own holdings gave him control of the company and enabled him to elect four out of the seven active members of the board.
Among the various important corporations in which there are now voting trusts, may be mentioned the Buffalo Electric Vehicle Company; William Cramp and Son, Ship and Engine Building Company; General Motors Company; Intercontinental Rubber Company; International Mercantile Marine Company; Lehigh Coal and Navigation Company; J. I. Case Threshing Machine Company; Loose-Wiles Biscuit Company; Hale and Kilburn Company; and Allis-Chalmers Manufacturing Company.
* Stuart Daggett's "Railroad Reorganizations," p. 310.
Among smaller corporations the voting trust is somewhat unusual. In many cases it might be found a legitimate and helpful means of securing agreement and continuity of policy.