Nominee structure enables founders to discreetly build their company
Gannons created a nominee company structure for three company founders. Two of the founders could only be involved discreetly due to ongoing commitments to their existing employer.
Our clients required a nominee company structure because for the first few months, only one of the three founders could overtly be involved in the business as either a shareholder, employee or director.
The other two founders had to be “undisclosed founders”. These two founders would face difficulties if their employer discovered that they were involved as employees or directors in the new company.
We prepared the corporate structure to ensure that the undisclosed founders remained discreet. We also drafted the necessary trust documents. Finally, we 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 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. Hence 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. The declaration of trust fully protected them, despite them not yet legally owning the shares as registered shareholders.
Redrafting the paperwork
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.
The share capital of the company was increased to cater for requirements – that was effected by drafting bespoke articles of association. Thus the shares were sub-divided into shares of £0.01, rather than £1.
Shares were reclassified as A, B and C shares, which each held different rights. 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 they could sell the company 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. This presented meant it would be difficult to attract the best talent.
Solution using C shares
The solution was to take on consultants, and award them C shares as an incentive. C shares would have no dividends or rights, other than the right to a share of capital on sale. This gave the consultants an incentive to work towards and help facilitate an ultimate exit of the company. Therefore upon the sale to a third party they would receive a slice of the consideration.
Bespoke articles of association
The changes to the Articles of Association that we made allowed the directors the bespoke control over their business that they required given their circumstances.
Firstly, our articles of association set out the class rights of the A, B and C shares. We then made sure to authorise the directors to issue shares without recourse to the shareholders. The directors had not yet issued any C shares, but we enabled them to issue C shares as and when they needed. That would help streamline growth in that event that the company engaged more consultants.
Pro rata shares
We ensured that shares on the board would be proportional to the board member’s shareholding. In the case of a nominee director, then it would be proportional to the shareholding of the person represented by the nominee director.
The two undisclosed shareholders could appoint one nominee director to represent both their interests. Professionals were appointed to represent the nominee shareholders’ interests.
Bespoke shareholders agreement
The undisclosed founders could be party to this shareholders’ agreement as it would not become public. The founders agreed to several important clauses within the agreement. Firstly, the agreement ensured that any important decisions were unanimous. They also agreed to restrictive covenants to safeguard the value of the company.
Drag along and tag along provisions
We made sure to enshrine “drag along” and “tag along” provisions in the agreement. These would only take effect after 5 years though. Within 5 years the directors hoped to have sold the company – which they would all agree to do.
Good and bad leaver provisions
Finally, we included “good and bad leaver” provisions. These 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. The shareholders would give these to the company upon the triggering of a bad leaver provision. The use of a power of attorney is very helpful in practice if relationships break down. This is because it allows shares to 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.
We would definitely work with Gannons again after they did such a wonderful job crafting a company structure unique to our circumstances.