Preference Shares - advice
I wonder if someone could help me with some basic information regarding issue of preference shares.
A company has issued 75 of its 100 ordinary shares to its serving directors. It is about to issue a further 25 to non participating individuals who are offering support but no financial investment. The company has not been trading for very long it is not yet profitable but is growing steadily. It was hoped that at some point when profits would allow that the directors could take dividends to supplement their low salaries and take advantage of the tax savings.However, it is not acceptable (for a number of reasons) to issue these 25% as ‘B’ shares without rights to dividends. We realise that the dividend on the 25% can be waived, but we do not wish to be constrained by a) needing to gain the waivers and b) needing sufficient profit to cover those dividends even if they were to be waived.So my thoughts were - is it possible to change the 75 shares (or perhaps a proportion of) into preference shares. My thinking is that this may protect the existing directors who have invested considerable time effort and finances into building up the company so that they may take their dividends (as originally planned) before any other dividends are paid/proposed. If this is possible should this be done prior to issuing the 25% and can anyone suggest how it should be done. Your thoughts would be appreciated so I can understand whether it is worth looking into this further.
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In these sorts of circumstances, I would talk the issue through with a firm which specialises in company formations and updating constitutions. The cost of updating the constitution may not be that great and would allow you to have more than one class of share. This would allow you to have ordinary shares with different dividend expectations and may be all you need. You dont have to spell out the differing rights in the constitution - just having different classes of share means different dividends can be paid.
When you are talking about a 25% share to people who provide support but dont put anything in, it sounds as though 25% may be too big a share - so the idea already suggested of 1 or 2 shares to these supporters may be a better way of balancing the share capital as well.
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Alternatives
I have been dealing with a similar situation lately. The Company, with me, explored many options including share option schemes, but in the end, the simple answer was to issue non financial contributors with a small number of ordinary shares at a premium with all rights - i.e one or two each, as this saved considerable costs and the creation of a second class of contributors to the company. This meant the directors would retain voting control (75% and above) & also maintain the motivation of the non directors. This has just as many "people" aspects to it, as to changing the articles, as the founding directors have to let go to a certain degree to ensure the company continues to grow. There is no reason for the preference share route to be taken if preferred, but I would issue news ones rather than re classify.
I hope this helps.