Nominee structure enables founders to discreetly build their company
- John Deane
- Updated: Wed, 7th Dec 2016
We created a nominee company structure for three founders. This was because for the first few months, only one founder could be seen as actively involved in the business: as a shareholder, employee or director.
The other two founders, “undisclosed founders”, had ongoing commitments to their existing employer. These two founders would face difficulties if their employer discovered that they were involved as employees or directors.
How we protected positions
We were instructed by the individuals, and:
- Prepared the corporate structure to ensure that the undisclosed founders remained discreet.
- Drafted the necessary trust documents.
- Enshrined different share rights in the articles.
Nominee company structure: declaration of trust
We registered the undisclosed founders’ wives as shareholders. Then we drafted a declaration of trust in favour of the undisclosed founders. This meant their wives held the shares on trust for the undisclosed founders until requested to transfer them.
Registration on the PSC register
The undisclosed founders were only required to appear on the persons with significant control “PSC” register. The PSC register lists the individuals that have control over the company, either through voting power or other commercial arrangement. The undisclosed founders only had a beneficial interest in the company by virtue of the trust arrangement. That in itself would not be enough for the undisclosed founders’ current employers to consider them actively involved with the new business as either employees, or directors, as they could refute any allegations to that effect.
Beneficial but not legal or “registered” share owners
In the meantime, the wives would vote as instructed by the undisclosed founders. The founders remained the “beneficial” owners of the shares. They were fully protected by the declaration of trust, even though they were not, for the time being, the “legal” or registered share owners.
Share capital, re-designation and re-classification
Before the founders approached Gannons, they had incorporated the company using template constitutional documents. We drafted the paperwork and meeting minutes for the necessary board and shareholder resolutions, so that:
- The share capital of the company was increased to cater for requirements – that was effected by drafting bespoke articles of association;
- The shares were sub-divided into shares of £0.01, rather than £1;
- Shares were reclassified as A, B and C shares, so that different rights could attach to the shares.
- The founders, or their nominees, held A shares, which had the full extent of rights, e.g. voting, dividends and share of capital on winding up. Care was taken to set up the structure so that the founders stood the best chance of qualifying for entrepreneurs’ relief;
- Third parties, who were investors, who would become holders of B shares, which had the same rights as the founders, except no right to vote.
Taking on employees with the issue of shares
The founders were confident that the company would be sold for a respectable price after about 5 years. However, they lacked the cash and certainty to take on employees. Nor could the start up business afford to pay consultants at rates over the market rate which presented a problem in attracting the best talent.
The solution was to take on consultants, and award them C shares as an incentive. C shares would have no rights to vote or dividends, but the right to a share of capital on sale if they were engaged at that time. That then gave the consultants an incentive to work towards and help facilitate an ultimate exit of the company, i.e. sale to a third party and receive a slice of the consideration.
Bespoke articles of association
We completely redrafted the Articles of Association. Some changes we implemented:
- Authorised the directors to issue shares without recourse to the shareholders. No C shares had yet been issued, but we enabled the directors to issue C shares as and when required. That would help streamline growth in the event that further consultants were engaged.
- To provide that shares on the board would be pro rata to the board member’s shareholding. In the case of a nominee director, then pro rata to the shareholding of the person represented by the nominee director, i.e. “weighted votes”. The two undisclosed shareholders could appoint one nominee director to represent both their interests. Professionals were appointed to represent the nominee shareholders’ interests.
- Set out the class rights of the A, B and C shares.
We drafted the board and shareholders resolutions to change the Articles.
Bespoke shareholders agreement
The undisclosed founders could be a party to this shareholders’ agreement as it would not become public. The founders agreed to:
- Ensure that any important decision was unanimously agreed.
- “Drag along” and “tag along” provisions, but only after 5 years. Within 5 years they hoped to have sold the company, which would have been unanimously agreed.
- Restrictive covenants to safeguard the value of the company;
- “Good and bad leaver” provisions: which set out the circumstances that required shareholders to surrender their shares on ceasing to be a company employee and/or director, or consultant.
Bespoke director’s service agreement
We prepared director service agreements, that included appropriate restrictive covenants. We also advised on powers of attorney, which would be given by the shareholders to the company if a bad leaver provision was triggered. The use of a power of attorney is very helpful in practice if relationships break down since it means that the shares can be surrendered back to the company or transferred without the departing shareholder having to sign a stock transfer form.
John Deane heads the corporate team at Gannons. The team advises individuals on a range of corporate structures. We draw on years of experience to ensure that the structure adopted fits with the intended purpose and future plans.