Freehold Company Limited by Shares - can shares be uneven?

carl_h

We are setting up a "Freehold Company Limited By Shares" as opposed to "By Guarantee". Many articles online refer to participants receiving 1 share each, however, ours have paid different amounts towards the purchase price of the freehold for the entire development. They wish to receive numbers of shares that reflect the total amount (minus other fees) that each participant paid.

This total amount was itself calculated according to 2 items, one variable & one fixed. The variable item was the floor area of their flat, the fixed item was an equal share of the costs of those residents (not many) who chose not to participate. Is it possible to allocate shares in proportion to the total sum paid (minus other fees) by each participant? Or is it only possible to get 1 share each? Thanks in advance for any assistance.

MacPingu1986

A limited company can be set up with the initial shareholders holding any number of initial shares, subject to any limits the subscribers set in the company's articles of association (essentially its constitution).

So yes a limited company could be set up with Party A holding 5 shares, Party B holding 10 shares, Party C holding 1 share etc...

I don't know if this is best practice for a freehold man-co, but it's certainly possible as a matter of company law.

Bookworm105

yes you can issues shares proportional to whatever you decide is the award basis 

have you considered what voting rights the shares will carry?
one vote per share?
one vote per shareholder? Unfair to those who paid more but avoids such people having more power than other smaller residents on collective impact decisions

are you aware of the implications of the company being limited by shares? 
that means if it goes bankrupt each shareholder is required to pay the face value of their shares - normally not a problem if they did indeed buy the shares in the first place, but it is unclear in your query if the money they have paid was to fund the freehold purchase itself or rather was to fund the company which then bought the freehold from the money it collected from its shareholders. A subtle but important distinction. 

I ask because if you issue proportional shareholdings then each shareholding resident needs to be aware of that potential liability given they will each hold proportional numbers of shares.
In the instances you have read about, where the company has 1 share per resident then each resident is liable only for the nominal cost of that share, for example it may be a £1 share. In contrast, if your formula means Fred Bloggs gets 845 shares and Mabel gets 300, then their respective liabilities would be £845 and £300, not merely £1 each if the nominal value is £1 - you can of course have any nominal value you like, but you'd need an accountant to correct record the payments correctly as it may involve creating a "share premium" account in the books 

what of the future? 
if Fred sells up and moves out, will the incoming new resident be required to buy the shares from Fred at, in my example, a cost of £845? If the new resident refuses to buy the shares because they cost so much, what will the man co do in respect of decisions that impact that resident?

carl_h

Very grateful for these speedy replies. It's a complex issue & needs a lot of thought.

carl_h

Regarding your query "...if the money they have paid was to fund the freehold purchase itself or rather was to fund the company which then bought the freehold from the money it collected from its shareholders..." I will disguise the details somewhat for confidentiality purposes. The company was set up so that the 5 Directors had 25 ordinary shares each, each valued at £1, making 125 shares altogether. We were hoping we could split these shares (x10) to create enough (1,250) to distribute to the participants in such a way that numbers of shares reflected amount paid/floor area etc. Some would have 30 shares, some might have 45, and so on. I'm guessing the value of each of the new shares would be one tenth of £1, little nominal value. Have I got this right or am I talking nonsense? 
The money the participants paid was indeed to purchase the freehold itself. My grip on these ideas is tenuous.

Bookworm105

carl_h said:

Regarding your query "...if the money they have paid was to fund the freehold purchase itself or rather was to fund the company which then bought the freehold from the money it collected from its shareholders..." I will disguise the details somewhat for confidentiality purposes. The company was set up so that the 5 Directors had 25 ordinary shares each, each valued at £1, making 125 shares altogether. We were hoping we could split these shares (x10) to create enough (1,250) to distribute to the participants in such a way that numbers of shares reflected amount paid/floor area etc. Some would have 30 shares, some might have 45, and so on. I'm guessing the value of each of the new shares would be one tenth of £1, little nominal value. Have I got this right or am I talking nonsense? 
The money the participants paid was indeed to purchase the freehold itself. My grip on these ideas is tenuous.

yes it is a straightforward process to do a "share/stock split" and google will give you loads of webpages detailing the process for registering that "corporate action"

However, to end up with the new shares distributed unequally amongst the existing 5 shareholders whose initial payment was an equal £25 each is a matter for professional advice as the same 5 people would end with unequal values of shareholding yet had originally paid the same - and that can't happen.

The alternative would be to create a new class of share which carries overarching voting rights and issue those disproportionally as your formula dictates. However those shares might need to be physically paid for by their respective holders, so would need people to stump up more cash - seek professional advice,

carl_h

Sorry, I had omitted to give details. When you say "...the same 5 people would end with unequal values of shareholding yet had originally paid the same - and that can't happen..." everybody initially paid a different amount (towards the total cost of the freehold) determined by (floor area + fixed component for the the non-participants + various fees). So originally everybody paid a different amount including the 5 Directors. They didn't pay the same. Does this help?

gm0

This is possible.  I can't help on the stock split and payment/even what are the rules or nominal value liability stuff.

You also do need to be somewhat careful in your selection of articles of association and company formation documentation. 

Legally and in setting freeholder+leaseholder expectations around what happens and how as people come and go.

I don't have a template. We are ltd by guarantee And keep a register version. 

So for us one lease one vote which moves old to new name when a lease is assigned. (And the conveyancer pushes that title change to LR).  Even for the worst case disaster recovery situation from abject record keeping by all - it is still recoverable from LR registrations by downloading from LR then writing to the primary lessee name at each unit address - to just reboot the whole thing. With a correctly rebuilt register.  Because it the register *has* to match the currently assigned leases via the design. Contact names / email / phone or proxy vote contact details are extra necessary details - but are not material.  To be a member (freehold owner) - you need to own a current lease.

By contrast anything that relies on private share capital record keeping.  Bits of paper moving via multiple lawyers or where bothering to do  Companies House filings lags reality.  Think about what can go wrong as directors come and go or left alone for lack of volunteers and then inconveniently drop dead.  And plan for it.  Most agents cannot be entrusted with this as the solution - though they can provide an extra information store and extra redundancy while doing management pack to conveyancers etc.

If you want uneven shares and to maintain financial interest split static as particular leases reassign - it generates some guff to be dealt with for good record keeping.  And the AoA etc. need to drive the desired behaviour.

One point to consider is whether the interest in the vehicle (the company shares) that acquires the freehold title) is separable from the ownership of leases of each unit upon lease reassignment.  My strongly held view is that the structure and drafting at the start should *so far as possible* eliminate this possibility legally. Tie the shares to the leases via one legal mechanism or another - template.

Not an optional separable extra thing that is bought or not.   The aim being to ensure that no new outside current lease and unit owning interests can re-emerge with a fractional freehold interest.  Such as when people sell a lease without the shares and leave with them.  Or die. Or get divorced.

In the system I prefer - the flat is sold or not with the share of freehold attached. Proceeds are distributed or not. Shares do not wander off as fractions with an ex partner or heirs. 

Some people may not like the idea of their ultimate commercial flexibility being curtailed. And others would not even countenance voting and paying for a share of freehold setup AT ALL unless it was so constrained. i.e. it's a showstopper for supporting the plan in the first place.  The purpose being to get and *retain* control of management of the site by owner occupiers and any non-resident leaseholder landlords.   

With a member register (ltd by guarantee) template and relevant drafting this occurs fairly naturally.   Check what your approach with shares does.  And game it for attempted separate disposal, death and divorce.

A 2nd point is on democracy and dissenting minorities at meetings. Example is "calling for full votes of all shareholders/members". Many sensible articles which allow simple majority voting and don't set a large "quorum" for meetings allow for this idea on company decisions.  As it promotes good consensus seeking behaviour by directors.

A dissenting minority ahead of or at a meeting can object to a proposed policy being adopted by said meeting and force a full vote of all members/shareholders - before it can come in later.  Only if approved by a (the defined) majority of all - not just those who happen to be invited (naughty) or attend (apathetic) a given meeting. 

We have a low threshold where <5% - basically one or two people objecting around an AGM can force a full vote but it has never happened in 20 years. Without members - you will need to use a % of voting shares as a threshold - perhaps set so that even the single smallest share flat which bought in - still gets the same rights.  And the people with 0 shares and just leasehold rights vs recharges from the freeholder - do not get a vote.  But to avoid tribunal etc. involving them in the annual cost vs service tradeoff discussions and mega whinge on recycling, pets, green energy transition and parking is still sensible practical politics.

carl_h

Hmm.. many factors! We are also hoping that this can be run as a "dormant" operation to avoid Corporation Tax, so no profits or surpluses are created. I assume this is achieved by making sure everything that comes in can be safely accounted for. I believe this can be done in a "limited by shares" but HMRC have to be convinced. Is that right?

eddddy

Won't the company be collecting ground rent and lease extension payments form those leaseholders who didn't participate in the freehold purchase?

Also, how will you enforce Service Charge payments on those that didn't participate, if it's not 'the company' that demands payment? Even if the current leaseholders voluntarily pay in some other way, if they sell, the new leaseholders might refuse to play ball.

Grumpy_chap

carl_h said:

We are setting up a "Freehold Company Limited By Shares" as opposed to "By Guarantee". Many articles online refer to participants receiving 1 share each, however, ours have paid different amounts towards the purchase price of the freehold for the entire development. They wish to receive numbers of shares that reflect the total amount (minus other fees) that each participant paid.

This total amount was itself calculated according to 2 items, one variable & one fixed. The variable item was the floor area of their flat, the fixed item was an equal share of the costs of those residents (not many) who chose not to participate. Is it possible to allocate shares in proportion to the total sum paid (minus other fees) by each participant? Or is it only possible to get 1 share each? Thanks in advance for any assistance.

You start by saying "we are setting up..." which implies a future event then later in the thread you speak of the company having been set up in the past tense.

Why is this being set up with the complexity that is discussed? 
A far simpler and more common approach would have been to each contribute and own equal shares and those shares move to future owners of the individual flats on transfer of ownership.  
This complex approach also means the different flat owners are liable for differing contributions to future costs - is that what was intended?

carl_h said:

Hmm.. many factors! We are also hoping that this can be run as a "dormant" operation to avoid Corporation Tax, so no profits or surpluses are created. I assume this is achieved by making sure everything that comes in can be safely accounted for. I believe this can be done in a "limited by shares" but HMRC have to be convinced. Is that right?

It won't be a dormant business though, will it?
There will be ground rent collected, maintenance activity on common parts, block insurance, and various transactions that prevent the business being dormant.
Corporation Tax will become due if the company makes a nett gain over any accounting year.

What professional advice did you take on the legal structure and accounting processes before setting this up?
If none was taken, then you need to take some now so that everything can be regularised.  This will incur a cost but far easier to resolve now while everyone is keen and remembers original discussions than in a while when there is a bigger mess to sort out.