How to Use Voting Agreements

Many people are unaware of what voting agreements are, much less what they do. Voting agreements are a form of contract typically entered into between principal shareholders (which could be corporations or individuals) of companies that are contemplating a merger or acquisition. The initiating party will seek to obtain a promise from a substantial shareholder of the company being merged or acquired to vote their shares to approve of the business combination. This, in turn, virtually guarantees that the deal will go through. This may sound complicated but these sorts of agreements are familiar and used very frequently.

But how can you as an investor, small business owner, or entrepreneur use voting agreements to get on and maintain a seat on your target company’s board of directors? Simple. By entering into a voting agreement with one or more other substantial shareholders that will yield the requisite number of shares, either a majority or some sort of super majority, to place yourself on the board. The typical language, which can be part of a shareholders’ agreement or other contract, goes something like this:

“We agree to vote our respective shares in the Company as necessary to elect [enter your name here] to the Board of Directors.”

Voila. One board seat for you on the board. This language can be expanded to include a time limit or take into account what happens if you resign in the middle of a term. There may be other considerations as well, such as the requirement to notify the company issuing the shares that a voting agreement has been entered.  You may also need to file a copy of the agreement with an officer of the company.  Refer to your company’s articles of incorporation, bylaws, and state corporation laws to see what’s required.

Although voting agreements are great in giving you the results you want, they are also very powerful and may not suit your particular circumstances. Make sure to discuss your specific circumstances and desired outcomes with your legal advisor before signing to make sure that a voting agreement is the best vehicle for you.