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Depending on the make-up of the company and its shareholder base you could arrive at many different appropriate combinations of rights and obligations. Longer- term


planning, however, is


essential as amending the articles of a company to reduce the rights attaching to a class of shares is rarely simple.


The law gives


protection to shareholders, and changing the articles in a way that reduces or expropriates their rights potentially gives them a claim unless they voted in favour of the change.


Changing the articles to enable a sale of the company, without support from every shareholder, may not be possible at all. MalaFides Ltd. had two classes of share – one class had voting and economic rights, and the other class had only economic rights amounting to around five per cent. of the total value of MalaFides.


The shareholders


who held the voting shares located a buyer for the company, but the sole holder of the non-voting shares was unwilling to sell – and the articles of MalaFides did not provide the majority with any means to compel him to do so. After a number of offers were rejected, the voting shareholders held an EGM and voted to amend the articles to insert a drag right which could force the holder of the non-voting shares to sell.


The non-voting shareholder brought a claim against MalaFides and the other shareholders, on the grounds that they had added the drag right to the articles specifically to part him from his shares whereas the law requires shareholders to add such rights to articles in good faith and for the benefit of the company as a whole rather than their own interests (i.e. being able to sell their shares). He was awarded a temporary injunction that prevented the sale taking place, and the other shareholders then settled with him out of court.


Had this right been given to the voting shares at the time that share capital was divided into voting and non- voting, there would have been no question as to the


good faith of the shareholders


– but by failing to plan ahead, the shareholders doubtless ended up paying well over the odds for those non-voting shares. They were also fortunate that their buyer did not balk at the delay, or the knowledge that one former shareholder was taking a robust approach to protecting his position.


Conclusion As these stories show, although issuing equity to employees is a powerful cog in any machine it is also one that demands care and attention. Failing to take care over the technicalities of allotment and issuance, or failing to plan out the rights and obligations that will attach to those shares, will store up expense for the company’s future.


David Willbe is a lawyer in the Corporate Group in the London office of Crowell & Moring, an international law firm.


Next month’s article will consider how, having issued shares to employees, companies can keep control of their shareholder base.


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