New shareholder class for special dividend?
This is more so theory than plans, and this is the only stack exchange that talks about corporate structure
Is it possible to make a new shareholder class, arbitrarily, solely for the distribution of a high dividend?
I was thinking, lets say that a private corporation (or even public, the only repercussion being the media) wanted to give one person a lot of money, could they make a small new shareholder class - that one person buys all of those shares - and then issue a 1000% dividend even several times?
What prevents arbitrary classes of shares from being created, anything?
2 Answers
It is in fact something done pretty often with startups, where early investors want the priority in dividends' payouts.
Depending on the jurisdiction there may be various limitations. In the US, for example, multiple classes of shares can only exist in a C corporation. In many jurisdictions there are laws protecting minority shareholders in cases of majority stake-holder abuse (which what you describe might be treated as), etc.
Bottom line is that technically there's a possibility, but you need to look really well at the local laws as to whether or not it is in fact doable in your particular case, and on what terms and under what conditions.
-
okay, interesting. I got a chance to look up the major stakeholder abuse thing, seems like there are more than enough jurisdictions to play around with on this issue, and the dividend would be issued long before the courts even took a cursory look at it. I think the concept is interesting because the shareholder could deploy very little capital for the corporation-approved payout, transferring wealth very conveniently anywhere – Cqm 12 years ago
-
@CQM dividends are usually paid from the corporation profits. At least in the US, if there's not enough capital in E&P account, then it is not a dividend, but a return of equity. Bottom line is that this is something not to be done before getting a proper legal and tax advice. – Littleadv 12 years ago
-
lets just continue our discussion on theory for entertainment and expressive purposes. is that a good enough disclaimer. The pro of this possibility is a smaller shareholders could reap greater benefits. for instance, lets say you have a multibillion $ corporation with millions of shares outstanding in class A. I'm thinking a Class B could have only 10 shares worth $1 each, but each of those shares would get a $100,000 dividend. Something very well priced in to the general revenue and profits. I feel like Bain Capital did something similar a few times – Cqm 12 years ago
-
@CQM so? Is there a question somewhere? – Littleadv 12 years ago
-
just, slightly extended discussion on theory. awaiting continued constructive input – Cqm 12 years ago
So (i) doing what you suggest would require amending the corporate charter, and that would need the approval of the other stockholders, and (ii) you haven't mentioned why the company would want to do this -- depending on the reason, the other stockholders may have a lawsuit for waste/breach of fiduciary duty/etc...
However, if a company's officers really wanted to transfer all of the company's cash to somebody else, there are much easier ways of doing it. Just declare him an employee and pay him a really big signing bonus, for example. Probably still lose a lawsuit, though.
-
probably not lawsuit with a good enough purpose. Here is one: Lets say your normal Class A shares gave a conservative 3% dividend, these shares can be allocated by billions of dollars from institutional investors, and with every dividend they make millions a year. while smaller investors only have limited cash inside their retirement accounts, maybe $5k-$10k dollars, the corporation -in theory- could offer this smaller class B of shares, which would be fully allocated with $5000 amongst a few hundred shares, & offer $35,000 dividends per share-for example – Cqm 12 years ago
-
I'm really just waiting for sources proving the roadblocks and hurdles to such a plan (or case studies), not fear,uncertainty and doubt based on the perceived uncommon practice of moving capital that way – Cqm 12 years ago
-
Well, so if everybody (including other shareholders) agrees to it, then, yes, you can do it. But, you won't find any case studies for it -- if you have multiple classes of shares, then you're a C-corp. And, if you're a C-corp, then both the corporation and the stockholder have to pay taxes on the money. And, the other shareholders probably aren't going to go along with it -- they rightly view that money as theirs. – Chris Fulmer 12 years ago
