Checklist of matters to be considered when forming a private company

1. What class and number of shares each shareholder is to receive. Are the shares to be fully paid, and is that in money or monies worth? If the latter, vouching will be required by the auditors as shares cannot be issued at a discount from their nominal value (see Note 1).

2. Are the shareholders also to be Directors of the Company?

3. Who is to be Company Secretary?

4. The Registered Office of the Company has to be decided. This can be a trading address, the Company lawyers office, the accountants office or elsewhere, but it is the place to which Companies House and the Revenue will issue correspondence so it is important that the address is manned and responsive.

5. Are shares to be given any special rights in addition to the rights they otherwise carry e.g. do they entitle the holder to appoint a Director to look after the shareholders interests. Is the vote of these shares essential to certain important decisions e.g capex? (Note 2).

6. Is shareholding to be linked to employment so that if the shareholder leaves the employ of the Company the shares have to be offered for sale.

7. Should death of a shareholder trigger a transfer of his shares, or should he be entitled to pass the shares to his beneficiaries? (Note 3).

8. Should a shareholder be entitled to transfer his shares during his life to his wife or other members of his family, which would usually be for tax planning purposes?

9. Are there any circumstances in which a shareholder should be forced to offer his shares for sale apart from the ones already mentioned e.g. criminal conviction, actings bringing the company into disrepute, bankruptcy?

10. How are shares to be valued when they are transferred? Should there be any discounting for the fact that the shares represent a minority interest? Who determines share value e.g the auditor?

11. What should be the quorum for members meetings. Should it be necessary to give notice of a meeting to a member who is abroad?

12. What should be the quorum for Directors meetings, and should it be necessary to give notice of a meeting to a Director who is abroad?

13. Should the Chairman of the Board have a casting vote in addition to his other vote as a Director?

14. Should Directors be able to vote in relation to contracts in which they are otherwise interested?

15. Should shareholding be linked to Directorship, so that if someone resigns as a Director he must offer his shares for sale?

16. Should there be any specific provision for payment of Directors fees or will this be dealt with on an ad hoc basis?

17. If there is an equal split in the shareholding there is the potential for deadlock and the question arises whether it is appropriate to provide how to deal with that deadlock. There are a number of options e.g.

• refer the deadlocked matter to an independent arbiter;

• provide for a "shoot out" so that one party has to offer for the other parties shares and that other either has to accept or to counter offer a higher amount;

• provide that the Company must be sold or wound up.

18. What percentage vote should be required for important matters in the Company? Some matters such as the issue of new shares other than pro rata to existing holders, altering the Articles, altering share rights by law require a Special Resolution (Note 4). However, by agreement this can be tightened up so that e.g a 90% vote is required for such important matters. It is also possible by a Shareholders Agreement to give each member a right of veto in relation to certain important matters, which is a variation of the class rights protections mentioned above.

19. Should there be a dividend policy when a certain proportion of profits is paid out, or should this be left to the discretion of the Directors or the shareholders? What percentage vote should be required for the payment of dividends?

20. Is it appropriate that each of the shareholders has a right of preemption if any of the other shareholders wish to sell. Is the price for exercise of a preemption right to be fair value? If there are more than two shareholders, should the exercise of preemption right be pro-rata to existing holdings?

21. Is it appropriate to have a "tagalong" provision, in terms of which, if a majority shareholder wants to sell, and the minority shareholder does not want to buy his shares in terms of a preemption right, that minority shareholder can ask to be bought out by the third party purchaser at the same price?

22. Is it appropriate to have a "drag-along" provision in terms of which, if a majority shareholder wants out, and receives an acceptable offer for their shares, then provided the minority shareholder is not prepared to pay the same price they can insist that the minority shareholders sellout at the same price.

Note 1: A shareholding holding more than 50% of the voting shares has effective control of the day to day running of the company, as he controls the composition of the board (Directors can be removed by Ordinary Resolution, which requires a straight majority vote).

A shareholding holding 75% or more of the voting shares can pass Special Resolutions, subject only to any quorum provisions.

A shareholder holding 95% plus of the voting shares can procure that meetings are held on less than the statutory minimum period of notice, subject only to any quorum provisions so this effectively constitutes complete control.

Note 2: These are sometimes called Class Protections and are common for institutional shareholders who usually require a right of veto on certain important matters such as alteration to the Articles or the issue of new shares.

Note 3: This can be a difficult issue. It is one thing to be in partnership with an individual, but another to be in partnership of that individuals wife.

Note 4: This requires to be passed at the EGM of which not less than 21 clear days notice is given and requires a 75% vote.