It may seem unlikely, but capital increases in a company can be blocked (usually unwanted) by a shareholder holding 1% of the shares in the company.
Nonsense you think? Quite the opposite, if classes of shares are created, e.g. class A shares and class B shares, it is indeed possible. Many shareholders are unaware of the risks involved in creating classes of shares, as the implications are usually unintended.
Procedure for classes of shares
Once shares are divided into different classes of shares, certain amendments require a procedure to be followed whereby a majority has to be obtained within each class of shares. The main example of this is a disproportionate capital increase in the company, e.g. the adherence of a new shareholder into the company’s share capital.
How can the minority be controlled?
Although there is (currently) no conclusive solution to avoid the abovementioned situation, there are a number of ways to keep this minority in control.
a) No classes of shares but individual rights to individual shareholders
First, it is possible to grant individual rights to specific shareholders in a shareholders’ agreement without creating classes of shares. Thus, dividend rights, voting rights, nomination rights etc. can be granted to certain shareholders in the shareholders’ agreement without requiring the creation of classes of shares. As such, this is done purely on a contractual basis.
b) Retaining control through a vehicle
A second possible solution is the creation of a vehicle in which the minority shareholders are pooled and which is controlled by the majority shareholder. A Dutch STAK is often used for this purpose. However, the same objective can be achieved by using a private foundation or a partnership.
c) Prior waiver of subscription rights or instructions
Thirdly, subscription rights can be waived in advance and/or instructions can be given by the majority shareholder(s) to the minority, obliging them to follow the majority in case of a (disproportionate) capital increase. However, the validity of such clause is controversial.
(d) Majority control within each class of shares
A fourth solution consists of the shareholder who wishes to maintain control (majority shareholder), to hold the majority within each class of shares. This would neutralize the blocking possibility of the minority shareholder, since the majority shareholder has de facto decision-making power within each class.
Look before you leap
Although there are no foolproof solutions to prevent the existence of classes of shares from providing the minority a veto right in the event of a (disproportionate) capital increase, there are solutions that can be devised and worked out to limit this unwanted power. In any case, it is recommended to obtain assistance from experts before proceeding to create classes of shares in your company.