Bringing a shareholder on board - Concerns

jcarver007

Looking for some advice - we have a small business and currently 2 of us are directors/shareholders with a 60/40 split. We are looking to bring someone in to assist in certain areas and to limit cost to the business an option raised has been to make them a shareholder with 30%.

Some questions and concerns I have are below and I wondered if anyone has experienced this scenario before and their thoughts?

Can they be given a % share but be limited in their ability to remove another director? A concern we have is later down the line 2 directors being able to force out the other.

Can they be limited in what decisions they can make?

Can the share amount we give the new personbe made in  increments and increased  based on their performance?

The new shareholder can join forces to force another director out at a later date. Can this be avoided?

Bookworm225

you can create what are often referred to as "alphabet shares", ie a new  class of shares which carry restricted rights as to what the holder can do 
so your existing shares ("Class A") would retain the right to appoint/remove directors and receive dividends 
the new share class ("Class B") would not have the right to appoint/remove directors but would receive dividends 

as you then have different classes it is therefore also possible to pay a different dividend rate to each class, so for example Class A get 5p per share whereas Class B gets 1p per share 

HOWEVER because you are increasing the number of shares in existence the company will need to be revalued and that is an exercise best left to your accountant as it can get rather complex in tax terms

random google result:
How can a company use different share classes? - Inform Direct

DullGreyGuy

jcarver007 said:

Looking for some advice - we have a small business and currently 2 of us are directors/shareholders with a 60/40 split. We are looking to bring someone in to assist in certain areas and to limit cost to the business an option raised has been to make them a shareholder with 30%.

Some questions and concerns I have are below and I wondered if anyone has experienced this scenario before and their thoughts?

1. Can they be given a % share but be limited in their ability to remove another director? A concern we have is later down the line 2 directors being able to force out the other.
2. Can they be limited in what decisions they can make?
3. Can the share amount we give the new personbe made in  increments and increased  based on their performance?
4. The new shareholder can join forces to force another director out at a later date. Can this be avoided?

1. Yes and no... you can create different classes of shares that have different rights on things like voting and dividends so yes you could give them a new class of share with no ability to remove a director. No, you cannot stop two being able to remove the third because the two existing shareholders could vote the new director off

2. As a director or shareholder? 

3. Yes

4. Depends on what you did with 1 and how the shares are reallocated, if the new director gets a non-voting class and the other two shareholders remain uneven then yes, if they were to side with the shareholder with the higher proportion they could force the current 40% holder out from being a director just as they could right now without being a shareholder. 


Note that shareholders can only vote on if someone is a director/employee not on if someone is a shareholder so whilst the 60% holder today could vote to remove the 40% director the person would remain a 40% shareholder and so still receive their share of dividends etc even if not actively involved in running the company. Obviously with the uneven setup they could potentially rail road other changes through depending on the company laws. 

Assuming you are expecting the person to do a work for equity deal you need to ensure it's actually going to be worth their effort else they'll just ask for normal payment. No one wants to be the lame duck at the table. 

jcarver007

DullGreyGuy said:

jcarver007 said:

Looking for some advice - we have a small business and currently 2 of us are directors/shareholders with a 60/40 split. We are looking to bring someone in to assist in certain areas and to limit cost to the business an option raised has been to make them a shareholder with 30%.

Some questions and concerns I have are below and I wondered if anyone has experienced this scenario before and their thoughts?

1. Can they be given a % share but be limited in their ability to remove another director? A concern we have is later down the line 2 directors being able to force out the other.
2. Can they be limited in what decisions they can make?
3. Can the share amount we give the new personbe made in  increments and increased  based on their performance?
4. The new shareholder can join forces to force another director out at a later date. Can this be avoided?

1. Yes and no... you can create different classes of shares that have different rights on things like voting and dividends so yes you could give them a new class of share with no ability to remove a director. No, you cannot stop two being able to remove the third because the two existing shareholders could vote the new director off

2. As a director or shareholder? 

3. Yes

4. Depends on what you did with 1 and how the shares are reallocated, if the new director gets a non-voting class and the other two shareholders remain uneven then yes, if they were to side with the shareholder with the higher proportion they could force the current 40% holder out from being a director just as they could right now without being a shareholder. 


Note that shareholders can only vote on if someone is a director/employee not on if someone is a shareholder so whilst the 60% holder today could vote to remove the 40% director the person would remain a 40% shareholder and so still receive their share of dividends etc even if not actively involved in running the company. Obviously with the uneven setup they could potentially rail road other changes through depending on the company laws. 

Assuming you are expecting the person to do a work for equity deal you need to ensure it's actually going to be worth their effort else they'll just ask for normal payment. No one wants to be the lame duck at the table. 

Thankyou, very much appreciate the feedback. Do you know what type of share class would limit the new shareholder to being unable to remove a director? I wasnt aware of this option.

Bookworm225

jcarver007 said:

DullGreyGuy said:

jcarver007 said:

Looking for some advice - we have a small business and currently 2 of us are directors/shareholders with a 60/40 split. We are looking to bring someone in to assist in certain areas and to limit cost to the business an option raised has been to make them a shareholder with 30%.

Some questions and concerns I have are below and I wondered if anyone has experienced this scenario before and their thoughts?

1. Can they be given a % share but be limited in their ability to remove another director? A concern we have is later down the line 2 directors being able to force out the other.
2. Can they be limited in what decisions they can make?
3. Can the share amount we give the new personbe made in  increments and increased  based on their performance?
4. The new shareholder can join forces to force another director out at a later date. Can this be avoided?

1. Yes and no... you can create different classes of shares that have different rights on things like voting and dividends so yes you could give them a new class of share with no ability to remove a director. No, you cannot stop two being able to remove the third because the two existing shareholders could vote the new director off

2. As a director or shareholder? 

3. Yes

4. Depends on what you did with 1 and how the shares are reallocated, if the new director gets a non-voting class and the other two shareholders remain uneven then yes, if they were to side with the shareholder with the higher proportion they could force the current 40% holder out from being a director just as they could right now without being a shareholder. 


Note that shareholders can only vote on if someone is a director/employee not on if someone is a shareholder so whilst the 60% holder today could vote to remove the 40% director the person would remain a 40% shareholder and so still receive their share of dividends etc even if not actively involved in running the company. Obviously with the uneven setup they could potentially rail road other changes through depending on the company laws. 

Assuming you are expecting the person to do a work for equity deal you need to ensure it's actually going to be worth their effort else they'll just ask for normal payment. No one wants to be the lame duck at the table. 

Thankyou, very much appreciate the feedback. Do you know what type of share class would limit the new shareholder to being unable to remove a director? I wasnt aware of this option.

the point is you create the class, it carries whatever powers you give it 
read the link, it explains the basic facts 

regarding 3, discuss with your accountant because if you drip feed new shares into existence ("created") that impacts the value of the existing shares and therefore may need a company revaluation each time you do it as it creates tax implications for the existing shareholders. Those are not cheap exercises to do.

You might for example create 100 new B Class shares in one go (so one revaluation exercise), but only issue them one at a time so that each issuing does not require a new revaluation. That is an action best left to a professional adviser

jcarver007

Thankyou Bookworm, much appreciated. So the new shareholder can be given class B shares and they cannot remove a director even in conjunction with an existing director? This sounds like a good option for us.

Bookworm225

jcarver007 said:

Thankyou Bookworm, much appreciated. So the new shareholder can be given class B shares and they cannot remove a director even in conjunction with an existing director? This sounds like a good option for us.

As you probably realise your company is, in reality, controlled by one person, the 60% shareholder. What they say is what will happen. 

It is impossible for the 40% shareholder to remove the other director as long as the other director is the 60% shareholder. Creating a B class shareholder with no voting rights will not alter that position or dynamic 

DullGreyGuy

jcarver007 said:

Thankyou Bookworm, much appreciated. So the new shareholder can be given class B shares and they cannot remove a director even in conjunction with an existing director? This sounds like a good option for us.

The 60% director already can remove the other director. So their shareholding would make no difference, they could even just be an outside consultant with no shareholding and plot with the 60% shareholder to remove the 40% shareholding director. 

uknick

If you bring in someone with a 30% share holding (by this I assume you meant they'll eventually get 30% of the profits) as part of their package, what do you envisage the split of the remaining 70% shareholding will be between the original shareholders?

If you stick with 60/40 then the new shareholder will have a larger share holding than the original 40% owner; 30% compared to 28%.

Bookworm225

uknick said:

If you bring in someone with a 30% share holding (by this I assume you meant they'll eventually get 30% of the profits) as part of their package, what do you envisage the split of the remaining 70% shareholding will be between the original shareholders?

If you stick with 60/40 then the new shareholder will have a larger share holding than the original 40% owner; 30% compared to 28%.

that is why you create different classes with different rights for voting and receiving dividends

convert existing shares into 60/40 split of class A with voting and dividend rights as now 

give 100% of class B to new shareholder (by instalments if preferred) with no voting rights and (possibly) different dividend rate

3 people now own the company but only the 60% shareholder has overall control 


in terms of how you manage dividends you then switch to looking at how much will each person get in money terms
if the company has £20,000 distributable reserves and you want the main shareholders to still take the lions share then you decide how much each person should get as a monetary sum and then express the dividend rate as the amount per share needed to get to those lump sums. 

Current position: 60/40 so £12,000 / £8,000

new position 3 shareholders: 1 and 2 decide how much of the 20K they want for themselves and split that 60/40 between the pair of them with the rest left to shareholder 3. You do that by virtue of declaring a different dividend rate for the B class held by shareholder 3.  

uknick

My comment had nothing to with the control of the company.  This was dealt with in detail by other posters.

If you still have to pay out 30% of dividends to the new person, having a share with a different dividend rate is moot.  Unless you're saying the new shareholder gets a class of share that awards 30% of the remaining profits after the original shareholders take their share.