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What is a Shareholder Voting Agreement and When Can it be Enforced?

Jul 13, 2008
A Shareholder Voting Agreement is a legal contract among shareholders of a corporation relating to the voting of shares. The shareholder voting agreement often covers how members of the Board of Directors are to be elected and sometimes covers major corporate events such as mergers and acquisitions. Venture capital investors often expect a shareholder voting agreement to be executed in connection with their investment in a start up company.

Voting Agreements are enforceable pursuant to state statutes enacted in all 50 states. For example, the pertinent statute of Indiana's State Statutes reads: Sec. 2.

(a) Two (2) or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose.

(b) A voting agreement created under this section is not subject to the provisions of section 1 of this chapter.

Often Shareholders may choose to pool their votes for a particular goal. Voting agreements may specify that the involved shareholders will vote their shares together or cooperatively. Courts usually uphold shareholder voting agreements as long as they relate to issues upon which shareholders can vote.

For example, lets say Don and Mike are shareholders of Detric Pesticide, Inc. Let us say that neither of them likes Ben, another shareholder, and they want to formally agree that neither of them will ever vote for Ben for a seat on the board of directors. In addition, they also include a provision that if they are outvoted on this matter, they will try to convince the company to pay Ben less than the other directors.

In this hypothetical, the first part of the agreement is valid because it relates to an issue on which Mike and Jessica can vote. They can legally agree, through shareholder voting agreement, not to vote for Ben. The second provision cannot be enforced, however, as a shareholder voting agreement because Ben's pay is within the discretion of the board of directors and will not come up for shareholder vote.

Voting pools may specify exactly how the participating shares should be voted, or they may allow for negotiation and agreement for each individual issue. Many voting pools include an alternative dispute resolution procedure for reaching agreement on such issues.

Some states require that voting pools follow specific guidelines to be valid. These laws may limit the length of a shareholder agreement, or may require that the shareholders deposit a copy of the agreement with the corporation. If a party to a valid voting agreement violates the agreement, the other parties may sue the uncooperative party. Courts may require that the dissenting shareholder vote according to the agreement, or they may disqualify violating votes.
About the Author
Mark Warner is a Legal Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents drafted by the top law firms in the US. Search over 10 million Documents, Clauses, and Legal Agreements for Free at http://www.RealDealDocs.com
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