We unravel problems taking account of where the balance of power and your interests lie.
We are always happy to discuss your situation and provide a scope and fee estimate. Please do give us a call.
Why you would want to work with us
We are a specialist law firm for establishing and enforcing shareholder rights focused on private companies. This means several things in practice for you:
- We have probably dealt with issues similar to yours before. This gives us experience to share with you.
- We help companies deal with their shareholders. We also act for shareholders individually providing the benefit of experience from all angles.
- Many clients come to us from much larger firms where they have grown tired of the fees and service. Our service is partner led.
Managing shareholder rights
We have explained below some of the key issues that often arise.
How to organise shareholder rights – share capital
Standard articles downloaded upon incorporation come with one class of shares. However, it is possible for companies to provide different groups of shareholders with different shareholder rights. For example different shareholder rights could be given to different groups of shareholders such as:
- The founders;
- Investors; and
The shareholder rights capable of variation within the company structure include:
- Dividend rights;
- Voting rights; and
- Capital rights. Capital rights are the right to receive capital following a sale of the company, liquidation or upon receipt of capital following an asset sale. It is common to see different rights for different shareholders and preferences.
Managing shareholder rights for different groups of shareholders
In order to provide different rights to different shareholders the company’s share capital or constitution will need to be set up into different classes of shares. The rights will need to be set out in the articles. Each class of shares created can then be used to provide different rights.
Shares held by founders
In many cases the founders are the last to be paid. Employees and directors receive fixed salaries reflective of the commercial rate. Founders take what profit is left after staff and creditors have been paid. Or, founders may retain profits for investment and not take out surpluses. The founders may well want to reward key employees and directors with shares. Being a shareholder can be motivational. There are a wide variety of tax efficient ways to reward employees.
Example of typical shareholder rights given to founders
If the founders or directors hold a different class of shares to the employees the share rights can be varied.
- For example, founders could be issued with A shares which permit a higher (or lower) rate of dividend to be paid compared to the B shares issued to employees.
- The B shares could include compulsory transfer provisions on leaving employment which do not apply to the A shares.
- The permutations between rights to voting, dividend income and capital are limitless.
Shares held by investors
Investors often require a special class of share is created within the company structure. Rights can be built into shares held by investors to hedge the risk of investment. This is particularly common in start up businesses. Investors often hold a different class of shares to those held by other shareholders to enhance their rights.
Example of typical shareholder rights given to investors
- Investors could be issued with C shares providing a preferential claim over capital compared to the A and B shares. On a sale or liquidation of the business the C shares could receive a higher rate of return and in preference to other classes of shares.
- The C shares could confer powers of veto. A list of matters requiring investor approval can be built into the share right.
- A different class of shares can facilitate a mixed loan and equity deal. It is possible to provide rights for loans to be converted into equity and agreed valuations.
Care is required where the investment is under the SEIS or EIS tax relief schemes for investors. The SEIS and EIS legislation does not permit a preference for investors.
Shares held by family members
Creating new classes of shares can be used to pass ownership of a business to family members. The type of share used to achieve succession planning are often called “freezer shares”. Freezer shares can be used to lock in existing value. Dividends can be tailored to provide certainty of income to cover items such as nursing homes.
Other considerations in determining shareholder rights
- Preparing for the sale of the company – exit strategy
- Minority shareholder rights
- Avoiding shareholder deadlock
- Dispute resolution – so if the parties fall out, then a mediator will first come in and settle the issue;
- Board control – if an equality of votes, an expert is given the final decision at board level. This is not dissimilar to having a non executive director who is a specialist in the company’s sector;
- Casting votes – so that one director has the final say;Issue of a further share – which has just voting rights attached to it.
- The approach to be taken on pricing the shares being sold by a shareholder who is exiting.
- How to issue new classes of shares
Existing articles of association
We recommend a review the company’s articles of association. The rights attaching to any class of shares (including alphabet shares, restricted shares, freezer shares, growth shares or flowering shares) have to be set out in the articles. You may need to pass an appropriate resolution to grant the board authority to:
- Allot shares;
- Exclude statutory rights, because:
- Existing shareholders have statutory rights of pre-emption on new shares.
- Reclassify existing shares into new classes;
- Change the share’s nominal value;
- Create new share classes;
- Make bonus or rights issues.
Shareholder rights in the shareholders agreement
The shareholders agreement can impose restrictions on:
- Introducing new share classes;
- Certain pre-emption rights;
- Altering share capital;
- Sale and transfer of any class of shares.
We do work through requirements and recommend workable clauses for the actual situation. What is best, depends upon the personalities and objectives behind the creation of alphabet shares