One of the fundamental building blocks of every corporation is the share capital. This is the means by which investors own the business. In old English law, it started out very simply. People who invested in and owned the business did so through holding shares in the business. Those shares had three basic rights attached to them: the right to vote, the right to receive dividends and the right to receive a proportionate share of the property upon winding up of the corporation.
Today, share capital is complex enough that courses are offered on the design of share capital to achieve various different corporate goals. I recently attended a webinar devoted to this very topic and learned that here at Galbraith Law we already have in place some excellent design features for our clients. I also learned a few new elements we can add to our repertoire.
Preferred shares are an excellent method for financing. Investors can, through the share attributes, be assured that they will receive repayment of their investment before the common shareholders receive any profit. Or, they can at least ensure that they receive all their interest and then flexible design can be used to divide remaining profit between the preferreds and commons. The common shareholders can ensure that they will continue to maintain control of the corporation by making the preferred shares non-voting or controlling the circumstances under which they will have the right to vote.
For corporations in the startup phase or in a business where income is cyclical, preferred shares offer options not available under conventional debt repayment. Payment to the preferred shareholders can be set so that it occurs on the cycles when the business has cash on hand. The preferred shares can also carry the right to receive cumulative dividends. If the business is unable to pay in one particular year the right to receive repayment carries forward to the subsequent year. Investors can also be enticed by the prospect of receiving a share of the profit. For example, the preferred shareholders can receive an initial dividend at a fixed rate and then still participate in any subsequent profit, either along with common shareholders or after common shareholders have received a certain share of profits. Typical debt repayment calls for regular monthly payments on a fixed schedule without variation. Options for designing the terms for preferred shares are as varied as the circumstances and designers who implement them. Preferred shares offer far greater flexibility for corporate investors and the corporations looking for funding.
Many more options exist for share capital design that can assist corporations in areas such as succession and estate planning, family and employee ownership and tax planning. Please call us if you are interested in learning more about how share capital design can assist your corporate planning