direction, the relationship between MindChange and the contractor broke down entirely.
At this point,
although the shares had been allotted, the contractor had not been entered in MindChange’s register of members and hence the shares had not actually been issued.
The directors decided that they no longer wanted the contractor as a shareholder, and as no shares had been issued they believed that they could simply walk away. In fact, having resolved at a board meeting to issue the shares and already having received payment for the shares (the contractor’s services), they were obliged to issue them. The mistake went undetected through several years (and funding rounds) – the only reference to it in MindChange’s records was the board minute allotting the shares, the significance of which was not noticed in any due diligence process.
In the end it was the contractor himself who brought the issue to light – when news got around that MindChange was being bought out, and he wrote to MindChange asking to be paid out for his shares. Given that the terms of the contract were largely inferred from correspondence there may have been room to argue the point, but with a deal on the table the founders of MindChange rightly concluded that their buyer would not want to deal with the contractor’s claim, and had no option but to use some of their sale proceeds to buy the contractor out. Had the problem been recognised at an earlier stage in MindChange’s development, the price that the founders would have had to pay to buy out the contractor would have been much lower – or they could have looked more closely at their correspondence with the contractor and tried to make the argument that the contractor had breached a term of their contract.
MalaFides Ltd.
After ensuring that shares are issued properly, the next priority should be to plan the rights and obligations that will attach to those shares. Will employees take the same shares as founders and management, with the same voting and dividend rights, or will there be a new class of shares with reduced voting rights so that employees can enjoy the economic value of the shares but without being able to influence the running of the company?
Will there
be a class of shares, held by the founders or (more often) an investor that can drag the employee shareholders into a sale? Will the employees’ shares have the right (a “tag-along” right) to add some or all of their shares to a sale that someone else has arranged?
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