Starting Business With 2 Others

paul7g

Hi,

I'm in the process of starting a new business with 2 other people, in which we will be splitting 3 ways (33.33%)

The other 2 people are already have a holding business and may wish to put their share of the new business under their existing business.

My worry is that while the 3 of us own equal parts from a high level view, it could be different on paper, as it could be:

Person 1 = 33.33%
Other Company = 66.66% (split 33.33% and 33.33%)

A - Given the above, does this mean that they would have more rights than me, as on paper they would be the majority share holder?

B - How do you split a company even ways when technically 100 doesn't divide by 3 evenly?

paul7g

paul7g wrote: »

Hi,

I'm in the process of starting a new business with 2 other people, in which we will be splitting 3 ways (33.33%)

The other 2 people are already have a holding business and may wish to put their share of the new business under their existing business.

My worry is that while the 3 of us own equal parts from a high level view, it could be different on paper, as it could be:

Person 1 = 33.33%
Other Company = 66.66% (split 33.33% and 33.33%)

A - Given the above, does this mean that they would have more rights than me, as on paper they would be the majority share holder?

B - How do you split a company even ways when technically 100 doesn't divide by 3 evenly?

If a corporate entity owns 66% then its the major shareholder and can do whatever it wants, probably theres a bunch of other problems that could arise with the solvency of said company and so on.
Not a good route to go down for you. If they want to use a holding company to own the shares, tell them you need to be 33% owner in the holding company and thats the only way its going to work.

NoQuarter

There is another way. The rules of your company are dictated by the memorandum and articles. If you work with a lawyer you can draft in provisions whereby shareholder decisions need to be unanimous or any other way you can think of phrasing it, i.e. shareholder resolution is the majority of shareholders save for you must be one of those shareholders. There's a few ways to skin a cat.

paul7g

Great, thank you for your help

boege

OP they may be doing this for tax purposes. If your new company ever gets sold then shares held in person are subject to an immediate tax liability whereas shares held by a company are treated differently. No personal tax liability would fall on your cofounders until they draw funds from their holding company.

Also, you are not going into business with these two people. You are going into business with a holding company which they currently control. If they sell their holding company then you will be in business with a holding company controlled by someone else. Be careful with this model.

In addition, as the holding company is the shareholder they can only vote one way as a shareholder. You, as a shareholder, will always be outvoted, unless you agree. My concern would be what happens if they have a disagreement.

If I was you, I would have a chat with a good commercial lawyer. Its not that you have a lot to worry about but you need to understand how such structures operate and the pros and cons. You may wish to use a holding company yourself.

I am involved in helping companies get off the ground and your situation is unusual, although not exceptional.

boege

boege wrote: »

OP they may be doing this for tax purposes. If your new company ever gets sold then shares held in person are subject to an immediate tax liability whereas shares held by a company are treated differently. No personal tax liability would fall on your cofounders until they draw funds from their holding company.

Also, you are not going into business with these two people. You are going into business with a holding company which they currently control. If they sell their holding company then you will be in business with a holding company controlled by someone else. Be careful with this model.

In addition, as the holding company is the shareholder they can only vote one way as a shareholder. You, as a shareholder, will always be outvoted, unless you agree. My concern would be what happens if they have a disagreement.

If I was you, I would have a chat with a good commercial lawyer. Its not that you have a lot to worry about but you need to understand how such structures operate and the pros and cons. You may wish to use a holding company yourself.

I am involved in helping companies get off the ground and your situation is unusual, although not exceptional.

These are all important points and the reason the only way to do this if they insist on using a holding company as mentioned is by joining their holding company as a 33% owner. You could change the shareholders agreement as mentioned earlier, which is costly and time consuming but it won't alleviate all potential problems by any means

NoQuarter

The only thing about joining their holding company is that you then become liable for anything that company may have done before i.e. if a creditor comes out of the woodwork for any reason. Not to mention that their holding company may have other assets and they presumably wouldn't want to randomly give you a share in those other assets. 

The best thing to do is, as I said before, amend the M&As to give you extra protection. It should only cost a few hours of a commercial lawyers time and will be well worth it int he long run. Don't forget that, unless the directors have the power to refuse a transfer of shares in the M&As, then any of the other shareholders can, at any time, sell their shares to someone else. or both other parties could decide in 6 months to sell their shares.

To help with that, you could perhaps build in some kind of vesting rights whereby if their shares are transferred, the change of hands of the equity is blocked. Another simpler solution might be to remove as much decision making as possible from the power of the shareholders and make every decision a requirement of the board. Then you each have a board seat and that way the percentage shareholding wont matter. 
In my eyes, all of the easiest solutions are contained int he drafting of the M&As.

paul7g

Thanks again all... much appreciated.

pedroeibar1

NoQuarter wrote: »

There is another way. The rules of your company are dictated by the memorandum and articles. If you work with a lawyer you can draft in provisions whereby shareholder decisions need to be unanimous or any other way you can think of phrasing it, i.e. shareholder resolution is the majority of shareholders save for you must be one of those shareholders. There's a few ways to skin a cat.

BS comment. Memorandum and articles? Really? A one third shareholder expecting to have control over the management of a company? Nonsense.
OP's only protection as a minority shareholder can only be on the basis of oppression. Your SKINNED cat is comparable to Monty Python's parrot!

NoQuarter

pedroeibar1 wrote: »

NoQuarter wrote: »

There is another way. The rules of your company are dictated by the memorandum and articles. If you work with a lawyer you can draft in provisions whereby shareholder decisions need to be unanimous or any other way you can think of phrasing it, i.e. shareholder resolution is the majority of shareholders save for you must be one of those shareholders. There's a few ways to skin a cat.

BS comment. Memorandum and articles? Really? A one third shareholder expecting to have control over the management of a company? Nonsense.
OP's only protection as a minority shareholder can only be on the basis of oppression. Your SKINNED cat is comparable to Monty Python's  parrot!

What? Of course it can't. You're thinking of a minority shareholders remedies if in trouble.
I'm talking about protecting his interests at the outset by building in protections into the company's constitution. A one third shareholder can have as much or as little control as is given to him under the constitution, which is a negotiable instrument. If the constitution says that his consent is required to pass any shareholder resolution then that's the law of the company.
Here's one more way to skin the parrot: negotiate that your shares have two votes while the other have one. Now the problem there is that it leaves deadlocks open, but at least that way the other two cant force a decision.

pedroeibar1

NoQuarter wrote: »

What? Of course it can't. You're thinking of a minority shareholders remedies if in trouble.
I'm talking about protecting his interests at the outset by building in protections into the company's constitution. A one third shareholder can have as much or as little control as is given to him under the constitution, which is a negotiable instrument. If the constitution says that his consent is required to pass any shareholder resolution then that's the law of the company.
Here's one more way to skin the parrot: negotiate that your shares have two votes while the other have one. Now the problem there is that it leaves deadlocks open, but at least that way the other two cant force a decision.

You wrote about a Memorandum and Articles of Association.

NoQuarter wrote: »

…..The best thing to do is, as I said before, amend the M&As to give you extra protection. ….. unless the directors have the power to refuse a transfer of shares in the M&As, ……..In my eyes, all of the easiest solutions are contained int he drafting of the M&As.

It is highly unlikely that the OP’s operation is/will be a dac; it is/will most likely be a plain limited company and will not have a "Memorandum and Articles of Association". Under the 2014 Act, a private company limited by shares (LTD) under Part 2 of the Act, does not have a memorandum (i.e. no set objects stated).

Nor is the company’s constitution the place for all of this, it would be better in a shareholders agreement. However, even with a strong shareholders agreement OP will lose control and risks his shareholding being diluted. It does not matter a d@mn if the proposed two new shareholders keep their shareholding individually or through their holding company, together they outrank OP in voting rights unless they acquire a class of share that does not carry voting rights of parity with his. No business can operate when a deadlock is possible. Those two, in business together, trust each other enough already to have a holding co.; they equally are smart enough and will not give OP a present of control of what was his company after they put their cash in. Should he find his back against the wall on being watered down, any action on oppression of a minority shareholder is neither realistic nor economically possible. If he needs a cash injection he should be looking at redeemable preference shares. By his post, the OP shows is naive on all of this and should get professional advice before he gets royally screwed.