Mission-driven for-profit entrepreneurs often face the tough task of deciding how to balance mission protection with growth. In this blog series, we will explore how traditional corporate entities can anchor their mission in the corporate DNA. In the initial three posts, we will discuss mission-anchoring strategies including: golden or veto share; voting trusts or voting agreements; and dual-class shares. Despite there being no obvious social character to traditional entity forms such as corporations and LLCs, these shares and voting mechanisms could provide mission protection while still permitting access to a large investor pool to enable fast growth and scale.
Golden Shares Definition
A golden share is a type of share with special voting- or other rights in limited circumstances. Golden shares often have trivial economic value or interest, since they are principally designed to convey special governance rights. Common examples include veto power in respect of changes to the company’s charter, the power to block a takeover, or the right to pre-empt a bankruptcy filing. Golden shares can be issued by companies to natural persons, companies, non-profit corporations, governmental entities, or trusts.
History of Golden Shares
During the 1980s, a wave of privatizations of state-owned companies led the U.K. government to use (and popularize) golden shares in an effort to assist newly privatized companies to adjust to the free market and to ensure ongoing national (instead of foreign) control over these companies. The U.K. government, as the holder of the golden share, had disproportionate voting power with respect to numerous decisions, such as mergers, disposal of assets, and election of directors. The U.K. government favored the golden share as a mechanism to achieve this kind of control, since the mechanism is flexible and allows for company-specific tailoring.
Other European countries followed suit. However, the Court of Justice of the European Union has ruled, on many occasions, that golden shares restrict the free movement of capital within the EU and that it is therefore in breach of EU law. Golden shares have also been utilized in Brazil, Canada, and Russia.
Golden Shares in the U.S.
Though the golden share mechanism seems to be available under corporate law (the Delaware General Corporation Law sets broad parameters for types of shares and does not seem to prohibit it), the use of the mechanism in the United States appears to be somewhat limited based on the dearth of case law dealing with it and published materials describing it.
Most often, the golden share mechanism is used to require certain equity holder(s) to consent to a bankruptcy filing; in other words, holder(s) of the golden share has the right to pre-empt a bankruptcy filing. Although courts have refused to enforce bankruptcy veto powers granted to creditors, they have, in some cases, respected the golden share where veto power was granted to a true equity holder.
Golden shares are also used as a check against the interests of shareholders in matters of values and commitments not related to profit. Based on the general flexibility of corporate law and the freedom of contract doctrine, a golden share could arguably be used as a tool by equity shareholders to preserve an entity’s social mission. This could be done by creating a separate class of shares that has limited or no voting rights, but that has the right to veto a merger, acquisition, sale of substantially all the assets, or a liquidation or any changes to the incorporation documents that would undermine the mission of the company.
Hogan Lovells and Big Society Capital’s 2015 report, Going for Gold: How Golden Shares Can Help Lock In Mission for Social Enterprises, outlines how a social enterprise business can preserve its mission as it grows and raises further investment. The Hogan Lovells’ press release captures the essence of the report:
Granting a golden shareholder the right of veto and control over the mission statement, which an enterprise is founded upon, makes it possible to ensure that the guardianship always remains in the hands of an organization where social impact, and not profit, is the primary focus.
According to the report, these shares could be issued at any one of three points of a business entity’s journey: 1) at start up – to embed the mission into the business right from the start; 2) growth – particularly if the social venture will be taking on equity investment; and 3) legacy – particularly when the founder or founders are preparing to move on.
Critics of golden shares note that if “no shareholders are able to acquire a significant stake in the business, they may be less motivated to keep a good monitoring eye on management than would a smaller number of larger shareholders.” One entrepreneur succinctly states his concerns: “Investors want to own the ‘special’ shares themselves. They don’t want the founders to own them. But whether they actually get what they want depends on which side has more negotiating power at the time of the investment.” Some of the concerns boil down to a question of fairness: “For good reason, many consider golden shares unfair because they allow the holder to overrule the wishes of all the other shareholders, even if those other shareholders constitute a majority of the ownership.” Supporters, on the other hand, refutes the assertion that all investors want ultimate control: “[G]olden shares allow investors to be confident that their money will be used for the social purpose they intended and that the enterprise is committed to that social purpose in the long term. It is also a signal that could help attract the right kind of co-investors, aligned to the social goals of the enterprise.” We believe a golden share could be an opportunity to attract socially minded impact investors instead of investors that focus solely on a large return on their investment.
In our next blog post, we will discuss voting trusts and voting agreements as mechanisms that can be used to anchor a company’s mission.
*Special thanks to Steve Kelton for his research assistance.