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Anatomy of a Term Sheet - Voting

For more information on this post contact Scott Preece.

The preferred shares held by investors typically have identical voting rights to the ordinary shares, i.e. one share, one vote*. 

It is rare for a venture capital investor to take a controlling stake in a company (the typical range is between 10-25%), which means that at the shareholder level an investor cannot positively control the company (we will discuss negative controls and board composition in another post ). That said, companies need to be aware that from an English law perspective certain corporate transactions will require the approval of shareholders. It is therefore important to analyse each investment and the impact that it may have to voting (we have seen companies with very "busy" capitalisation tables, which makes obtaining the required voting thresholds difficult).

Examples of transactions requiring shareholder approval are as follows:

Matters requiring the approval of 50+1 per cent of the votes ("Ordinary Resolutions")

  • Removing a director
  • Authorising the directors to issue shares (which would include shares to be issued pursuant to an investment)
  • Sub-dividing, redeeming or consolidating shares
  • Authorising a buy-back of shares
  • Approving a director's conflict of interest
  • Approving a director's loan
  • Declaring dividends

Matters requiring the approval of 75 per cent or more of the votes ("Special Resolutions")

  • Amending the Company's articles of association (which is usually required for each investment round)
  • Changing the name of the Company
  • Dis-applying statutory pre-emption rights (which may be required for each investment round)
  • Reduction of share capital
  • Amending share class rights

*The only time this is different is when the documents contain anti-dilution protection on a conversion basis (see Anatomy of a Term Sheet - Anti-dilution I) and there has been a dilutive issue, in which case the preferred shares will have more than one vote (as the preferred shares will be treated as if they had converted into ordinary shares which will be at a ratio of more than 1:1).

The Anatomy of a Term Sheet series can be found in full here

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