Voting Agreements

One problem with shareholder voting is the shareholders. They get ideas and that creates unpredictability.

Voting agreements, often called pooling agreements, are agreements in which shareholders agree in advance on how they will vote their shares. Delaware and MBCA jurisdictions recognize voting agreements and allow specific enforcement. DGCL § 218(c); MBCA §§ 7.31, 7.32. These agreements are most commonly used to control the composition of the board, protect shareholder rights or force a sale of the company. 

For example, before you invest in some start up, you may want everyone to agree that they'll support your choice for one board member. Or a family business may want to ensure that all the siblings keep their seats on the board. Or a few major shareholders may agree that if a majority of them want to sell the company, they'll all vote to do so.

You might be thinking, "But what about democracy! President Franklin didn't give his life crossing the Delaware just to see democracy traded in backroom deals among fat cat shareholders."

And you'd be wrong in a number of ways. Enforcing voting agreements promotes freedom of contract, predictability and (perhaps surprisingly) minority shareholder power. By allowing small groups to pool their shares in a voting agreement, smaller shareholders can combine to effectively counter the will of larger shareholders. Old Ben would have loved that.

The easiest way to set up a voting agreement is by contract. The National Venture Capital Association has commonly used sample forms available. Voting agreements can be bolstered by each shareholder granting an irrevocable proxy to a trustee. MBCA § 7.22(b)(5). This is one of the few exceptions to the rule that proxies are freely revocable.

A harder way of doing the same thing is through voting trusts, where all the shares are legally transferred to a trust with power to vote the shares. DGCL § 218(a); MBCA §§ 7.30. These reach the same result but are more complicated than voting agreements, so they are rarely used.