19 Oct When Non-voting Shares Get to Vote Part I

Posted at 19:02h in Corporation, Dealings with Shareholders, General by John M. Figol

There are many reasons for issuing non-voting shares: incentivizing employees with equity, issuing shares to family members, or capital raising through crowdfunding campaigns. In most cases, these reasons are balanced with a founder’s desire to maintain control over critical decision making on behalf of the company.

But… are non-voting shares truly non-voting?

The short answer is ‘no’. The legal answer, as you may have guessed, is that it depends on the situation.
Non-voting shareholders are not entitled to vote on regular shareholder matters but are entitled to vote on numerous fundamental changes. Some of these changes include:

  • increasing or decreasing the maximum number of authorized shares of a company,
  • exchanging, reclassifying, or cancelling shares,
  • adding, removing, changing the rights, privileges, restrictions, or conditions of shares (i.e. changes to accrued dividends, cumulative dividends, redemption rights, liquidation preferences, conversions privileges, options, voting, pre-emptive rights),
  • creating a new class of shares with rights or privileges equal to or superior to such shares, and
  • adding, removing, or changing restrictions on issue, transfer, or ownership of shares.

One way to think about this is that non-voting shareholders vote on all matters that impact the rights that attach to their shares.

So, you have read the list, and may be questioning it… these are not day-to-day matters. You still have the votes required to elect the board of directors, and directors appoint officers and manage the day-to-day affairs of the company.

But the matters that non-voting shareholders vote on are not trivial. Issuing non-voting shares should not be either, and founders should consider their business needs and objectives before doing so.

Consider the following. You developed your minimum viable product. Your company is ready to go to market and raise funds. You find a Venture Capital (VC) firm that is interested in investing in your company. The VC requires preferred shares to be issued on the financing. In this case, non-voting shareholders vote with voting shareholders to approve/reject the creation of this superior class of preferred shares to be issued to the VC. You may get the votes. You may not. The deal could fall through.

This may not be an issue if you control a majority of the issued and outstanding shares (i.e. the voting and non-voting shares collectively) but your control may change over time as you issue more shares to non-voting shareholders.

Further, there are other situations that require fundamental changes to be approved separately by holders of each class of shares (stay tuned for Part II of When Non-Voting Shares Get to Vote for more on this).

The examples above are some of many situations that could arise and result in deal-breaking problems.
These potential problems can be avoided with proper consideration and planning. Issuing shares in series with different share attributes or creating a voting trust are examples of alternatives to issuing non-voting shares which may work for you. But context matters.

It is crucial that you consult your business lawyer before issuing shares or creating a capital structure. If you have any questions, do not hesitate to contact a member of the Ross Rumbell team.