Non-voting shares

Scenario 1: entry of an investor

When the partners do not want the new investor to participate in the management of the business, the signing of a joint venture agreement is usually proposed:

• With this agreement, the investor does not participate in the capital or become a partner: they simply contribute money and participate in the prosperous or adverse results of the company or a specific activity of the company (in the percentage they agree on).

• Logically, they have the right to be informed about the business progress (at the agreed frequency) and to receive their share of profits.

• And, after the agreed period (for example, five years), the joint venture is liquidated and the investor receives the remainder of their investment (so that, if there were losses, these reduce the final amount they receive).

However, many investors prefer to enter the company's capital. Although they accept that the partners manage the business, entering the capital allows them, in some cases, to obtain the tax incentives provided for in the Personal Income Tax Law for business angels. b usiness angels.

Well, both positions can be combined through a capital increase with the issuance of non-voting shares (or non-voting shares in the case of a public limited company). As it is an investment in the capital, the investor will enjoy the indicated incentives, while the current partners will continue to manage and control the business activity.

• The holders of these shares or participations have the same rights as "regular" partners (right to attend meetings, to be informed about the company's progress, to participate in profits...), so they will be able to know the business "from the inside". But they will not have the right to vote at meetings, so decisions will continue to be made by the current partners.

• In exchange for the loss of the vote, the law recognizes these participations the right to receive a privileged dividend. Therefore, in addition to the "ordinary" dividends they are entitled to (proportionally to their percentage of the capital), they will have the right to receive a minimum annual dividend, which may consist of a fixed or variable amount and which must be established in the bylaws in any case.

If the company has profits, the minimum dividend must be distributed to the partners holding non-voting shares. That is, it is a mandatory and, moreover, double dividend (in the sense that, once received, the non-voting partners will be entitled to the ordinary dividend corresponding to their participation in the company's capital). If there are no profits to distribute or if they are insufficient, the part of the minimum dividend that is not paid in that fiscal year must be paid within the following five fiscal years. Until that minimum dividend is paid, the owners of these participations will regain the right to vote.

The existence of this minimum dividend does not imply that the investor will receive more than initially planned: it will be sufficient to adjust their percentage of participation so that they receive the negotiated compensation. Thus, if they had agreed that the investor would participate in 40% of the results and set the minimum dividend for non-voting shares at 5% of the results, the investor's contribution will entitle them to subscribe to 36,84% of the capital. See where this percentage comes from:

Scenario 2: family business: entry of children

This figure can also be used in family businesses, especially when the partners consider involving the next generation in the capital, but do not want to lose control when making decisions. For example:

• New non-voting shares can be created through a capital increase. This increase will be subscribed by the family members who join the business.

• Or the bylaws can be modified by changing the regime of some existing shares, which will go from being "ordinary" shares to non-voting shares. Subsequently, these shares will be transferred to the children, either through sale or donation.

In both scenarios –and in any other where new family members join the capital–, caution must be exercised in the valuation assigned to the new shares, to prevent the Tax Office from considering that there may be a donation.

• If a capital increase is carried out, formalize it with a share premium, so that the value of the shares of the previous partners is not altered. For example, if the company has a capital of 100,000 euros, but a real value of 500,000 and they want the new partners to participate by 20%, these new partners must contribute 125,000 euros (25,000 in capital and 100,000 in share premium).

• If some shares are modified (so that they become non-voting), ensure that, when transferring them to the new partners, they do not assume unnecessary tax risks. If they are transferred by sale, ensure that the operation is valued at its real value (to prevent the Tax Office from considering that there is a hidden donation). And if they are transferred by donation, take into account the tax costs of this operation (which may vary from one autonomous community to another) or, in any case, verify if the tax incentives for family businesses can be applied to this operation.

Remember that the donation of shares or participations of family businesses to the spouse, descendants, or adopted children enjoys a 95% reduction in the Gift Tax, provided that the donor is over 65 years old and ceases to perform managerial functions in the business.

Use non-voting shares or participations if you want to transfer part of the company's capital but, at the same time, maintain control over the agreements adopted at shareholders' meetings.