Non-Voting Shares – An Elegant Solution

Clark Griswold, Sr.: “It’s a beaut, Clark; it’s a beaut” – dialogue from Christmas Vacation

I am often confronted with a somewhat difficult ownership issue that can usually be addressed by what is a relatively straightforward solution; namely the proper use of non-voting shares in a succession plan.  I am surprised that I do not see this technique more often and I have come to believe that it is somewhat misunderstood, so I thought it might be worthwhile to offer some clarification.

My history with this issue started with a consultation I had a number of years ago with a very frustrated sibling (Brother A.)  His father had owned 100% of their company and although he consulted with others during his business life, all knew Dad was in charge and he made all the tough calls.  Unfortunately, the father had passed away a year earlier and wanting to treat his two sons fairly, he left half the company to “A” and half to the other sibling (Brother B).  Unfortunately, “B” had never been involved in the business while “A” had been there for 20 years and had been through a pretty decent succession planning process.  So, what was the issue?  Well, “B” started to exercise his new found rights as a 50% shareholder creating confusion and turmoil in the organization which started to manifest itself in quality issues, turnover of key personnel and declining profitability. “A” believed that without addressing this issue, the Company would get into deep trouble.

So, I undertook a small consulting project to address this and quickly realized that “B” felt his role was uncertain and undefined, but thought he was doing what was right to contribute his expertise as a half owner.  While “B” was perfectly content with his economic interest, he felt he should contribute to help the business he owned with “A” but he just did not know how.  We objectively considered the skill sets required to run the business and “B” realized his were not a match.  He did not understand what his role should be and we established some corporate governance that defined the roles of “A” and “B”.  We also (with the help of legal counsel) outlined how both could maintain their economic interest while allowing the business to carry on.  So, in the end, we converted “B’s” shares to non-voting and all turned out well.
The message here is that one should consider using non-voting shares anytime there is going to be ownership change (other than by investment) resulting in the transfer of ownership to a party not actively involved in the business.  This allows the economic distribution goals to be met while allowing the “management” of the business to carry on.  Please keep in mind that one always has to consider the corporate governance/control aspects of stock ownership when reaching conclusions here.  It would have been a beaut to have had the non-voting technique in place to avoid some of the angst for both of these brothers.

 

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