Enforceability of Voting Agreements: What You Need to Know

Voting agreements are a common tool used in corporate governance to ensure that key shareholders vote together on important matters. However, the enforceability of these agreements can be a complex issue that requires careful consideration.

In the United States, the enforceability of voting agreements is generally governed by state law. This means that the rules may vary depending on the state in which the agreement was formed. However, there are some general principles that apply across the board.

First, it’s important to understand the difference between a voting agreement and a voting trust. A voting agreement is a contractual arrangement between two or more shareholders to vote in a certain way on specific matters. A voting trust, on the other hand, is a legal arrangement in which shareholders transfer their voting rights to a trustee for a specified period of time.

When it comes to enforceability, voting trusts are generally considered to be more reliable than voting agreements. This is because a voting trust is a legal entity that can sue and be sued, whereas a voting agreement is simply a contract between shareholders.

However, that doesn’t mean that voting agreements are always unenforceable. In fact, many courts have upheld these agreements in certain circumstances. For example, if the agreement is reasonable in scope and duration, and is designed to protect the company’s interests, a court may be more likely to enforce it.

There are some key factors that courts will consider when determining the enforceability of a voting agreement. These include:

– The purpose of the agreement: If the purpose is to promote the interests of the company or its shareholders, the agreement is more likely to be enforced.

– The duration of the agreement: If the agreement is too long or too restrictive, it may be deemed unenforceable.

– The scope of the agreement: If the agreement covers too many matters, it may be deemed unenforceable.

– The fairness of the agreement: If the agreement unfairly benefits one shareholder over another, it may be deemed unenforceable.

It’s also important to note that some states may have specific statutory requirements for voting agreements. For example, Delaware requires that such agreements be filed with the company’s records, and that all shareholders be given the opportunity to participate.

In conclusion, the enforceability of voting agreements is a nuanced issue that requires careful consideration. If you are considering entering into a voting agreement, it’s important to work with an experienced attorney who can help you navigate the complex legal landscape. By doing so, you can ensure that your voting agreement is as enforceable and effective as possible.