In the situation of acquiring shares in a B.V., letter shares are regularly used. But how does this differ from the acquisition of ordinary shares?
Letter shares are shares with different rights from ordinary shares. In general, letter shares increase the flexibility to properly structure a business acquisition. We speak of "letter" shares because different types of shares are designated by a different letter (A shares, B shares, etc.). I will discuss below two situations in which letter shares are commonly used.
Working and financing shareholder
When taking over shares in a B.V., the wishes of a large number of shareholders often have to be taken into account. In addition, the contribution of one shareholder often differs from that of another.
One shareholder will probably be an important man/woman for the business, while the other shareholder only has a financing function. In that case, it may be a solution to work with letter shares where the financing shareholder takes, for example, cumulative preferred shares (cumprefs) that give him a fixed return on the amount paid on those shares. If there is underperformance in any year, then cumprefs give double the return the following year.
Cumprefs thus resemble a loan but are not, fiscally and legally. This can have several tax and legal advantages. The "working" shareholder is usually only entitled to any profits (and appreciation!) remaining after the cumprefs have had their return. Incidentally, the financing shareholder also wants his share of the profits and appreciation over and above the portion of the cumprefs.
'Soft employee participation'
An employer is quite often tempted to let his employees participate in shares in the business in order to increase key employees' attachment to the business. Moreover, it can be fiscally attractive to offer employees the chance to be rewarded in a tax-friendly way instead of a progressively (up to 52%) taxed bonus.
However, if it is a well-run business then the shares are probably very expensive and therefore not affordable by the employees. In such a situation it may be convenient to "letter" shares where the employees acquire cheap (letter) shares that only entitle them to the future increase in value.
When using letter shares, the first thing to pay attention to is what is regulated about this in the company's articles of association. Next, it is important to properly regulate a number of situations, including the sale of shares, in a shareholders' agreement. Finally, the tax consequences of letter shares must be carefully considered.
