Company Structure and Shareholders Stakes

Hi All,

Extremely new to this website and am looking forward to useful and beneficial responses.

I have conducted a fair bit of research myself and have gained somewhat an amount of knowledge regarding structure, as well as consulted with Accountants and Lawyers up until the point when they want to start charging me, which I am not prepared to pay for yet as I am still not confident in the entire process. So I am seeking advice from the community to assist with clarity and direction on our journey. Many thanks in advance, and I am appreciative of your recommendations and guidance, I am not looking for any criticisms, just support and positive guidance.

Recently, I have had some new business opportunities come my way, and through the use of interested stakeholders, we are looking for the best way to set up an organisation along with good distribution of shareholders stakes and dividends.

To give you some background of where everything is at, below is details of the vision and the envisioned structure.

We are looking at a few different business ventures and we feel initial structure being crucial so we want to ensure it is done correctly.

Basically, we have three different ventures arising in three different industries.For this, we are looking at setting up three different entities: COMPANY A, COMPANY B and COMPANY C. Each will have their own separate trading names, ABN's/ACN's and will operate independently from each other. These three companies are going to be Subsidiaries to a Holding Company - which we can call COMPANY X.

COMPANY X is going the be the only shareholder in each of the individual subsidiaries, so COMPANY X owns COMPANY A, COMPANY B and COMPANY C entirely.

In addition to the above structure, there will be some overlaps of company directors in the three companies, COMPANY A, COMPANY B and COMPANY C. That is, there may be a director of COMPANY A, who is also a director of COMPANY C, and vice versa. This is due to different expertise and specialties being shared throughout the different entities as required.

COMPANY X (the holding company) will also have a director (most likely only one), and the director of COMPANY X will also be a director of each of the other subsidiaries: COMPANY A, COMPANY B and COMPANY C.

Now the reason we have determined this type of structure is to limit liability should it occur in one of the subsidiary companies. In regards to director salaries, this is not the topic of discussion and has already been decided upon reflected upon the company bylaws.

All profits generated by the subsidiaries are to feed back to the holding company COMPANY X.

Profits will then be distributed among the shareholders of COMPANY X.

I am yet to understand the benefits of having this structure held in a trust arrangement, for this particular scenario. Any advice on whether or not a trust would be recommended would be appreciated, as well as a representation of why it should be under a trust.

Now, as for the shareholders of COMPANY X. There will be a total of six shareholders in COMPANY X: Mr 1, Mr 2, Mr 3, Mr 4, Mr 5 and Mr 6. Each individual hold different proportions of ownership in COMPANY X. But, it is viewed that Mr 1 hold as much as 51% to ensure total control and maintain ownership of this organisation due to him being the founder, and creator of the opportunities. The other share holders, may or may not play as much of an important role, so their percentage stake will be an assortment of different fractions in comparison to some of the other shareholders.

For argument sake,

Mr 1 holds a 51% stake,
Mr 2 holds a 16% stake,
Mr 3 holds a 4% stake,
Mr 4 holds a 5% stake,
Mr 5 holds a 20% stake,
Mr 6 holds a 4% stake.

Although there is a diversified allotment of ownership, we are yet to establish how profits would be fairly distributed. That is, Mr 1 is not entitled to 51% of profits generated and so on. However, for example, we feel that if Mr 3 facilitates a significant 'deal' due to his directorship of COMPANY C with an abundance of margin, that Mr 3 be rewarded for his efforts as a type of bonus. Then the remaining profit from that 'deal', be fed from COMPANY C then COMPANY X and disbursed among shareholders as dictated by what ever the bylaws stipulate.

In addition to this, we have also sourced an investor who is willing to back the organisation with a capital offering for the businesses funding needs who will refer to as Mr 5 with his 20% stake. Mr 5 however, will not hold Directorship in any entity, he will have involvement and/or understanding with the direction of the companies, he may even share his opinion on certain topics that arise, he wont have voting rights, wont be involved with any day to day operations, rather he will sit back and watch the company grow and collect profits over a period of time. His equity is not required to be paid back as a loan, the only value he brings is providing working capital (essentially his buy in stake) to boost the business operation. Other shareholders will bring intangible assets to the table, filling their stake/interest in COMPANY X. They will receive a share of profits (dividends) as dictated by the bylaws/company constitution.

The uncertainty lies around the following questions:

- Is this the correct way to structure this organisation?

- When registering the companies with ASIC; and, noting shareholders and directors, as required, how do we reflect the desired structure.

- Is there any concern when registering companies (as outlined above) with regards to investor capital and shareholders ownership percentages? That is, one shareholder (Mr 5) has bought into the company when the others haven't. Is it necessary to display the buy in amount as purchase of share in the company, or is this to be structured/displayed differently?

- Is this the right way to go about ensuring Mr 1 retains majority stake in all of this? The concerns lies that if, a dispute were to occur later down the track between shareholders and/or directors and shareholders and/or directors essentially gang up on Mr 1 and attempt to either take over control of the company, kick him out, out vote him or take directorship off of him, how does Mr 1 ensure this does not happen.

- Should a Trust structure come into play, and if so, How would it be reflected in this scenario? and Why?

- Are there any faults to this structure or amendments that need to be made?


- How does profit distribution get decided upon to be either evenly distributed or distributed on a fair basis. That is, profits may not be distributed 'evenly' because certain shareholders have such a minor stake and do not play much of a role in the grand scheme of things.

-How is voting declared or organised when decisions need to be passed?

-What element of control and voting unanimous does Mr 1 hold with his 51% ownership? How does this differentiate to certain decisions being made when engaging in a resolution and/or final verdict?

As you can see it is quite confusing and I hope you can understand our concerns and queries. Guidance and constructive opinions or insights are highly appreciated. As I mentioned earlier, we are looking at getting this correct from the beginning.

I look forward to hearing your responses and guidance on how to structure this correctly.

 

Hi Nickolas

Welcome to the forums. They are small but some great knowledge on here.

TRUSTS

The issue is that companies offer top down asset protection, not bottom up. Shares are assets, so if shares are held in personal names you can find your fellow shareholder is replaced by a creditor or bankruptcy trustee. Alternatively your fellow shareholder may be forced to sell at short notice to avoid this.

I am a strong advocate that ALL shareholdings should be in special purpose vehicles (disc trust) and that the shareholder's agreement makes this a non-negotiable requirement.

It's great that you are asking the other questions above as it means you have really considered the structure.

A shareholder's agreement will deal with a lot of your issues. You are looking at a touch under $2k for one of those. Specialist legal advice on this sort of thing is essential, it's like insurance. If nothing ever goes wrong with the business or any of the shareholders then you may not need it, but if a situation arises and you need it, will be too late.

 

Why do you not want to pay for proper legal advice?
This is very complex and the structure will depend on a lot more than you realise.

To begin with I suggest you go out and buy a textbook on Company law and have a read up as much as you can, work out as much as you can before paying for some expensive legal advice.

You might also want to get some tax advice on the small business concessions etc.

Keep in mind that companies can issue different classes of shares with different rights and powers

 

Thank you for your feedback and response, this is extremely constructive and I appreciate your time in providing me with a useful and constructive response for my concerns.

I will do some further investigation on a special purpose vehicle as you mentioned and I also appreciate your assumption of costs to getting a shareholder agreement in place.

Thank you

 

Thank you for your recommendation on the book, that is certainly a great idea!