Last month our blog addressed the issues of using different kinds of equity, for example issuing a preferred class of stock to one shareholder or a group of shareholders and a junior or common class to other shareholders. Comments about equity participation also apply to control. Many people tend to think of control as being a simple percentage of the stock and an equal percentage of the voting power of the company. However, I tell clients that control is like a pie, you can cut it into as many slices as you like.
For example, a moderately complex control arrangement would be one that allows the shareholders to act by simple majority on most matters, but gives the preferred shareholders a right to elect at least one member of the board of directors of the company. A separate provision in the company bylaws would provide that the board of directors also acts by simple majority, except that certain extraordinary actions require a super majority or even unanimous consent of either all classes of equity holders or directors, or both. Examples of extraordinary actions could include a sale of the company, the issuance of more stock, the amendment of the organizational documents, or the mortgage of substantially all of the assets of the company.
By dividing control into these types of increments, it is possible, for example, to preserve normal operational and managerial control in the hands of current management while offering an outside investor or other party the opportunity to protect himself in connection with actions, such as a sale of the company on terms, that would not allow the investor to recover his initial investment.
DISCLAIMER: This blog is a highly simplified general discussion. It is not legal advice. Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.