Things You Didn’t Know About Shareholders
When you have a business that has shareholders, you probably don’t give much thought to the different ways that you can structure the rights or powers of your shareholders. You also may not give much thought as to the risks that shareholders can pose. Here are some little known things about corporate shareholders, that you can incorporate—or at least be aware of-in your business.
Did you know that there are two ways that shareholders can vote? The first way is called cumulative voting. Cumulative voting lets a shareholder pool his or her shares, when voting on an issue.
Let’s say that you are having elections or appointing officers and there are two positions open. Cumulative voting would allow a shareholder with 100 shares, to vote 200 shares to any one candidate.
The alternative, in traditional, or statutory voting, would only allow that shareholder to vote up to 100 shares for each candidate or position.
The benefit of cumulative voting is that allows shareholders who may have fewer shares, a greater say on what happens with the company. It can also be used as an incentive to shareholders who may have fewer shares.
If you want to offer cumulative voting, it must be listed in your company’s bylaws, or articles of incorporation.
Shareholders Aren’t All the Same
Some shareholders can get paid differently. Some may have the option to sell back their shares to the company. Some shares may be voting and some nonvoting. Some may only “vest” (take effect or become owned by the shareholder) after a certain time period, or event.
This is done by creating classes of shares. Each class has powers, duties, and rules, as defined in the company bylaws or articles of incorporation (as well as in documents given to the shareholder before he or she purchases or is given the shares).
Allowing you to make different rules for different classes of shareholders gives your company a lot of flexibility.
In many companies, especially smaller ones, the company knows the shareholders. But what if the shareholder loses his or her shares?
Shares can be lost when a shareholder gets a divorce, files for bankruptcy, dies, or even just has a judgment entered against him or her by a creditor. All of the sudden, the shareholder’s shares are involuntarily transferred, and suddenly your company has a shareholder that you don’t know, and didn’t want. What’s worse is that the new shareholder may not care about or participate in your business at all.
You can create provisions in your company bylaws that say that in the event of an involuntary transfer, that the company must be given the option to buy back the shares. Alternatively, you can opt for any involuntarily transferred shares, to convert to nonvoting, or non-dividend paying, to discourage involuntary transfers.
Consult with our West Palm Beach commercial litigation attorneys to discover your business’ legal issues. Let our lawyers at Pike & Lustig, LLP, help you. Call us at 561-291-8298 to get a consultation.