Working with types of shares in your company: watch out for these pitfalls!

Imagine the following situation: two shareholders set up a company together and each hold half of the shares. Over time, the founders wish to reward and further motivate a number of key people in the company with shares. These shares carry certain membership rights (e.g. voting rights at the general meeting) and asset rights (e.g. right to share in the profits). The founders want to allow the employees to share in the profits, but do not want them to be able to block certain decisions at the general meeting.

A logical reflex here is to work with types of shares. When different rights are attached to a certain series of shares than to another series of shares in the same company, we speak of different "types of shares". For example, the founders could hold class A shares (with voting rights and the right to participate in profits) while the key persons would acquire class B shares (without voting rights but with the right to participate in profits). A shareholder agreement and the articles of association could then further specify the rights attached to these types.

Beware, however, of the undesirable consequences! In the previous example, the intention was to avoid the key figures having a say in the affairs of the company.  

Suppose now that the general meeting wants to finance the further growth of the company by an additional cash contribution of the founders, whereby new shares of type A are issued. In that case, the shareholders of type B could be put off. When, in the case of a contribution, only shares of one type (A) are issued and not shares of the other type (B) are issued proportionally, one speaks of a "change of rights attached to a type". Since, after the issue of additional class A shares, there would be more shares of class A but still as many shares of class B, the shares of class B will proportionally share less in the profits. Their right to profit participation would therefore be affected.

To this end, the legislator provided for a legal protection mechanism: such a contribution cannot be approved by a simple majority for an amendment to the articles of association, but also requires a simple majority within each class of shares. In short: the shares of type B to which no voting rights were granted could still block the additional contribution. Illogical, but not insurmountable. After all, the law allows such situations to be modulated, for example by granting specific rights to certain persons instead of attaching them to the shares.

So be alert for possible pitfalls when drafting shareholder agreements and articles of association. Our firm will be happy to assist you in working out a solution tailored to your company.

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