How to set up shares and voting rights in a limited liability company correctly?

The correct setting of shares and voting rights in a limited liability company is crucial for effective company management, protection of shareholders and prevention of disputes. What are the options for the distribution of shares, what to look out for and what are the legal implications of each option?

Author of the article: ARROWS (Mgr. Pavel Čech, office@arws.cz, +420 245 007 740)

Shares and voting rights: what does it mean?

In a limited liability company, the shareholders participate in the company through their shares, which represent their rights and obligations. A share can be expressed as:

✔ Capital - according to the amount of the contribution to the share capital.

✔ Voting rights - determines the power of a shareholder's decision-making when voting at a general meeting.

✔ Profit-sharing - the proportion in which shareholders have the right to receive dividends.

Note: The law allows voting rights and profit shares not to be the same as the amount of the share of capital. It is therefore crucial to set up the articles of association correctly.

Options for the distribution of shares among shareholders

When setting up a company, different share options can be set up to suit the needs of the shareholders, for example:

1. equal shares

Each shareholder has an equal share in the capital and voting rights.

✅ Simple to manage.

❌ Risk of blocking decision making in case of disputes.

2. Preponderance of one shareholder

One shareholder has a majority of voting rights (e.g. 70%), the others a minority.

✅ Efficient dispute-free governance.

❌ Minority shareholders have limited influence on decision making.

3. Disproportionate voting rights

Shareholders may have different shares of capital but equal or different voting rights.

✅ Allows for a flexible distribution of power.

❌ Requires precise wording in the articles of association.

4. Shares without voting rights

A company may issue shares without voting rights but with a right to a share of profits.

✅ Allows financing without loss of control.

❌ Limits investor influence on decision making.

Practical implications of shareholding arrangements

Every share allocation has an impact on the operation of the company and the relationship between the shareholders. For example, a share split is intended to have the following effects and implications:

✔ Blocking of decision making - with equal shares, deadlock can occur.

✔ Influence on voting on key issues - amendments to the articles of association, appointment of managing directors, approval of financial statements, etc.

✔ Protection of minority shareholders - if they have less voting power, so-called qualified majority can be used for certain decisions.

How to set up the articles of association correctly?

To make the distribution of shares and voting rights work, it is necessary to draw up the articles of association correctly. This contains key provisions, in particular on:

• Profit sharing.
• Voting rights.
• The rights and obligations of the shareholders.
• Share transfers.
• Protective mechanisms for minority shareholders.

Conclusion

The correct setting of shares and voting rights in a company is essential, especially for the management of the company and the prevention of conflicts between shareholders. We recommend thoughtful drafting of the articles of association and consideration of protective mechanisms.

Not sure how to set up shares correctly? Contact ARROWS attorneys who will expertly prepare a shareholders' agreement tailored to your needs.