Clever use of share classes to distribute value across shareholders could become mainstream<\/p>\n
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Happy New Year.\u00a0 I hope you had a good break.<\/p>\n
As we ran towards the end of 2024 the primary theme of the races we were running was how the terms of a share class impact on the share of value it commands as a proportion of the whole company.<\/p>\n
This is an increasingly interesting area which historically VC and PE investors had mastered in the context of grabbing their share of returns on exit, but in fact it is much more important than that.<\/p>\n
It\u2019s an issue we all need to start communicating more clearly to people who are setting up or who have already set up companies.\u00a0 By the appropriate use of share classes, control clauses in articles and judicious use of shareholder agreements, the value of different share classes can be determined unambiguously \u2013 especially when it comes to thinking about tax!<\/p>\n
Let\u2019s take the issue of voting shares and non-voting shares.\u00a0 Voting shares are frequently used to control the company, but if they are not constrained properly via clauses in the articles or in a shareholders\u2019 agreement, the share class value could be much higher than you think. In a situation where you want to control a company but not benefit from it, it is relatively straightforward to constrain value in the class through a clause in the articles which removes the class\u2019s right to dividends and any return of capital, but this may not be enough.\u00a0 What if the voting shareholder gave themselves a highly paid job at the company?\u00a0 And what would the non-voting shareholder pay to get control of the company?\u00a0 This is where a sensible shareholders\u2019 agreement can ensure that further constraints are put in place to address the issue of value leakage.<\/p>\n
When it comes to preference shares, it\u2019s important to understand what value they really hold.\u00a0 The coupon is a critical issue \u2013 does it encompass future risk as to payment of dividends and a return of capital or not?<\/p>\n
You definitely need a specialist to consider how much value is attributable to a preference share where there are conversion and control provisions attached to the class.\u00a0 You cannot simply prepare a dividend yield valuation and forget it.<\/p>\n
We are all familiar with companies with numerous classes of voting shares.\u00a0 Analysis of the waterfall is crucial to determine who shares in what value and under what conditions.\u00a0 As the underlying performance of the business changes, so too will the relative value of the share classes.\u00a0 There is plenty of opportunity for value to seep from one class to another and back again.<\/p>\n
The use of deferred share classes is increasingly popular.\u00a0 Care needs to be taken that the return of capital to the shareholders in such a share class is possible.\u00a0 Don\u2019t forget to think about nominal value of the deferred shares relative to the number of shares that could end up in the share class.<\/p>\n
We have started 2025 very busy indeed, which is encouraging.\u00a0 Did you know that we now have 20 law firms referring work to us?\u00a0 We will therefore be investing in our team so expect to see some new faces on Teams calls, but we will always make time for another valuation, so give us a buzz if you think we can help.<\/p>\n","protected":false},"excerpt":{"rendered":"
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