If you are going to be retaining shares in your company even after you have exited the business, you will need to think carefully about the shares structure you have in place.
See my article on share types for more information about the rights attaching to shares, the types and classes available.
In order to decide how many shares anyone has in the new structure; it is important to think about what you want to use the shares for:
- Monetary incentive now? The right to a dividend on the shares to allow them to receive a share of the profits will be important.
- Monetary incentive further down the line? The right to a share of the capital of the company will be key here. Or perhaps the opportunity to be issued with more shares if agreed KPIs are reached?
- Participating in decision-making? Voting rights and the percentage of the whole of the company’s voting shares needs to be considered. Shareholder resolutions are only required for certain company decisions, such as changing the company name, amending its articles, reclassifying shares, authority to issue shares and other key decisions. Some decisions require a 51%+ majority, some £75%+. Therefore, the number of shares held by different shareholders could be very important for future decision-making.
- Flexibility for declaring dividends – differing share classes can allow for this.
You may also want to consider whether senior management being promoted internally, or even new hires, should be made directors of your company. It is very important to remember – for both you and the person being appointed – that everyone understands that this is more than just a title. Being a statutory director of a company brings certain duties and obligations with it. These include duties to a company’s shareholders (who may not all be directors), to its creditors, to promote the success of the company, not to act in conflict with the company, to ensure all company law is followed and the (public) Companies Register is kept up to date, to exercise reasonable skill, care, and diligence, amongst others. Breaching any of these significantly could result in a director making themselves personally liable. However more often than not, it will be the Company that picks up the pieces of a director’s wrongdoing.
Formal board meetings will need to be called and minutes written out detailing major decisions. Certain directors cannot be ‘left out of’ decision-making as this could make the decision ultra vires and open to be overturned.
Also remember, senior people within a company often wear three distinct and separate legal ‘hats’ – that of director, shareholder, and employee. Each of these areas needs to be considered and respective rights and obligations detailed in writing accordingly. A handshake may seem fine at the outset – until someone has a very different recollection of what was agreed. Always, always – GET IT IN WRITING. And of course – remember you are not obliged to make someone an employee, director, AND shareholder. They all stand alone.
However, getting this right can be a fantastic method of paving the way for your exit, whilst preserving the future of your business. If you would like to discuss your business in more detail do not hesitate to contact me on karen.blakesley@cognitivelaw.co.uk.