Canadian Securities Course (CSC) Level 1 Practice Exam

What is the purpose of a voting trust and how does it work?

1. It consolidates voting power to a single individual

2. It is used for tax advantages

3. It is used when a corporation is undergoing restructuring due to financial difficulties

4. It is a trust fund for shareholder distributions

The correct answer is: It is used when a corporation is undergoing restructuring due to financial difficulties

A voting trust is a mechanism primarily used to consolidate voting power among shareholders, often when decisions are to be made that require aligned interests or when a corporation is undergoing changes such as a merger or acquisition. The purpose of a voting trust is to streamline the voting process by allowing shareholders to deposit their shares into the trust. This effectively enables the trustee to vote those shares collectively according to the terms established in the trust agreement. In circumstances like restructuring due to financial difficulties, shareholders might seek to ensure that their interests are adequately represented and that voting power is not fragmented among numerous independent shareholders. By using a voting trust, they can present a unified front, which can be particularly advantageous in negotiations with creditors or other stakeholders involved in the restructuring process. The other options present scenarios that do not accurately reflect the primary function of a voting trust. Such trusts do not inherently provide tax advantages or serve strictly as a distribution mechanism for shareholders. Instead, their main role revolves around governance and decision-making during critical phases for the corporation.