Is it time to invite a new shareholder into your business?

Many businesses owners will find themselves in situations where they want to invite new shareholders into their business. This can be new investors, business partners or key employees in an organisation. This is exciting however business owners should have the following three practical considerations in mind:

Control

If you are the major shareholder, how much control are you willing to give away?

Giving away shares will mean your overall shareholding reduces. Business owners generally understand this concept. However you may not be aware of the possible impact on voting control and dividends.

Focusing on voting purely at investor level, shareholders make decisions by passing resolutions. To pass a resolution, it will require either a simple majority of 51% or for more important decisions a majority of 75%.  If you reduce your own shareholding to under 75%,  you are then reliant upon someone else to agree with your decision. Your voting control is becoming diluted.

One way to avoid this is to create a different class of share which has no voting rights. Whilst your shareholding may have reduced to 70%, you will have retained voting control. This is because the new investor is will not be able to vote as a shareholder.

A different class of shares may also help in terms of the declaration of dividends. It means you can announce different dividends should the need arise.

Method of purchase

To obtain shares in a company, the company can issue and allot new shares, or an existing shareholder can transfer some of their shares.

To decide which route to use, you will want to know if the company is to receive the money or not and also any tax implications. An allotment of new shares will usually mean the company receives the investment funds. This does not usually occur via a transfer.  In terms of tax, dependent on value and the method used, there may well be capital gains tax, stamp duty tax and income tax implications. So, an accountants advice is always useful!

Management of relationship

Once everyone has their shares, how do you manage the ongoing relationship? What happens to the shares if someone dies? That person leaves the business? Or an offer for the business is made and one party is happy to sell and another is not? It is a little bit like making a will, you never want to think of the difficult situations, but you don’t want to end up in a power struggle or in business with someone you don’t like. We would therefore look at a shareholder agreement or possible update to the articles of association to cover these situations as they arise. These documents will also provide peace of mind to the parties involved.

For a conversation about the best route to bringing someone into your business please contact us on [email protected]