Privileged Shares: A Way to Customizing Technology Firms
Under the TCO, variety of privileges may be given to shares or shareholders groups. Privileges must be stipulated under the articles of association of the company. Generally, privileges are given to shareholders by creating different shareholder groups such as “Group A” and “Group B” or to the minority shareholders. Privileges may also be given to a specific shareholder group. For example, shareholders who are software engineers or medical doctors may be given privileges prescribed in TCO.
Types of Privileges
Managerial Privileges: Most common privileged shares are the managerial privileges. Typically, managerial privileges are given to the majority shareholders grouped under Group A and minority shareholder grouped under Group B. To give an example, if the company’s board of directors (management board in limited liability companies) consist of 5 people, Group A (majority) may be given privileges to nominate 3 out of 5 members. If a cumulative representation on the board is desired, Group B (minority) may be given privileges to nominate 2 out of 5 members. Such privileges are also used by private equity and venture capital firms subsequent to an equity investment to ensure overseeing the management of the company they have invested in. Joint ventures (equity joint ventures and contractual) may have similar as well. However, privileges given to the shareholders in a contractual joint venture are not bound by the limitations of the TCC. Moreover, privileges may be given in a way that a group of shareholders may nominate every member of the board of directors notwithstanding their shareholding percentages. Last but not the least, rather than grouping the shareholders under Group A and Group B, managerial privileges may be given to shareholders grouped as software engineers, medical doctors, scientists etc. As per the TCC, unless stated otherwise in articles of association of the limited liability company, chairman management board is entitled to a tie-breaking vote unlike the joint stock companies where the chairman of the board does not have a tie-breaking vote. Managerial privileges may also consist of nominating a chairman of the management board who has a tie-breaker vote. Yet, tie-breaking vote rights of chairman is not a mandatory provision of the TCC and may be amended.
Voting Privileges: Another common type of privileged shares are voting privileges during general assembly meetings. Typically voting privileges are given to a shareholder or group of shareholders that wants to have a greater say in decision making of the company. Maximum voting privilege per share is 15. However, as per the TCC, the court may extend the voting privileges per share under limited circumstances. For example, if shareholder A holds 100 shares that have a voting privilege (15 per share), then the shareholder’s votes should be multiplied with 15. Since many substantial decisions are made by the general assembly resolutions, such privileges may be too powerful. In addition, when electing board members such voting privileges would be used as well. Nevertheless, in accordance with the TCC, during articles of association amendments, discharge of board members, resolution to file a lawsuit against board members for the breach of fiduciary duty and electing an audit firm in general assemblies, such privileges shall not be used.
Dividend Privileges: Dividend privileges may also be granted to shareholders. the dividends are distributed to shareholders pro rata their shareholdings, some shareholders may be granted privileges so that they receive additional dividend payments compared to their shareholdings or cumulative dividend in which a fixed amount or a percentage (as prescribed in articles of association) of company’s profits must be paid to the shareholders as dividend and if the profit is insufficient to cover the percentage or fixed amount, remaining amount shall carry over to the next fiscal year of the company. Abovementioned privileges may be stipulated under the articles of association simultaneously.
Post-Liquidation Asset Distribution Privileges: Privileges regarding asset destruction post liquidation of the company may be granted to shareholders. In normal circumstances, after paying off the creditors, assets are distributed to shareholders pro rata their shareholdings. Existence of a privilege related with the asset distribution subsequent to company means that privileged shareholders would receive additional assets compared to their shareholding percentage. Such privileges may be used by outside investors to compensate their investment after the target’s firm failure reach its financial and strategic goals.
Privileges regarding Pre-Emptive Rights: All shareholders are entitled to a pre-emptive right pro rata their shareholding. However, shareholders who were granted privileges regarding pre-emptive rights, may use their pre-emptive rights ahead of other shareholders. For example, subsequent to a share capital increase through share issues, privileged shareholder may use its pre-emptive right to buy the shares in accordance with its privilege as prescribed in articles of association and then may use their pre-emptive rights in accordance with the TCC. Other shareholders, may also use their pre-emptive may use their pre-emptive rights granted them by law.
Veto Rights: Veto privileges may only be granted in limited liability companies. Veto rights may only be used against specific general assembly decisions as prescribed in articles of association of the limited liability company.
TCC has provided variety of tools for the entrepreneurs to customize their company as they see fit. Some other rights may also be stipulated in articles of association such as drag-along and tag-along rights. However, they would not be considered as a privilege in accordance with the TCC. Technology firms who are in need of financing may use abovementioned tools to accommodate fund providers; although most of the time fund providers dictate the terms of the business transaction which would most likely include managerial privileges. Abolishing privileges is also possible under TCC however it would most likely require the consent of the privileged shareholders.
Author: Batuhan Ecin