Different types of shares in a limited liability company:

Are you considering setting up a limited liability company (s.r.o.) or changing the articles of association of your company? Do you want to set up greater flexibility of shares in an LLC? Shareholders can own multiple shares as well as different types of shares with different rights and obligations. In this article, we will explain clearly what types of shares exist and what can be adjusted differently from a so-called basic share (an ordinary share without special rights). We will look at practical examples - for example, situations where one shareholder wants more control over the company and another wants a larger share of the profits - and show the advantages and risks of each solution. Finally, we'll advise why it's worth consulting a lawyer about such arrangements to avoid mistakes when setting up or amending the articles of association.

Author of the article: JUDr. Kateřina Müllerová, ARROWS (office@arws.cz, +420 245 007 740)

Basic vs. special share: what does the law say?

A basic share is a share that does not carry any special rights and obligations. In short, it is an "ordinary" share which usually gives all shareholders the same rights under the law (e.g. voting rights proportional to their contribution, a share in the profits according to the size of the share, etc.). In contrast, a special share (or also a special type of share) is one that has certain rights or obligations regulated differently. If several shares carry the same special rights and obligations, they together form one kind of share.

The ZOK expressly allows the articles of association to allow for different types of shares. One person can even own several shares at the same time, even of different types, if the articles of association allow it. This is a big difference compared to the situation before the recodification - until 2014, the strict rule "one shareholder = one share" applied and special arrangements of rights to shares were not allowed in the law. Now, within the limits of the law, the partners can "tailor" their mutual rights through different types of shares.

Example: imagine two founders of a startup - Jana and Petr. Jana puts a unique idea into the company and will run it, while Peter contributes more capital. They want to do business together, but have different priorities: Jana wants to have control over the company, even though her contribution is smaller, and Peter would like to get the highest share of the profits from the future success of the company. By adjusting the types of shares, they can set up their shareholders' agreement to suit both of them - for example, giving Jana a share with higher voting rights (control) and Peter a share with a higher right to profit than his contribution.

The law, of course, also sets limits on these adjustments. The basic limits are twofold: firstly, the content of the various types of shares must be precisely defined in the articles of association (Section 136 of the CCC).This means that the articles of association of your LLC must specify what types of shares the company has, what they are called and what special rights or obligations are attached to them. Secondly, some rights cannot be completely taken away from all shares - for example, there must be at least one share with voting rights in the company. Below we discuss in more detail what specific rights can be modified in respect of shares and to what extent.

Possibilities of share modifications in s.r.o.

The following is an overview of the most common areas in which different rights or obligations associated with a shareholding in an LLC can be set up. Compared to the standard setup (basic share), the following in particular can be agreed in the articles of association:

• Different voting rights: by default, each shareholder votes at the general meeting in proportion to his or her share in the share capital (profits and voting rights are distributed in proportion to shares by default). However, the articles of association may specify a different number of votes per share. You can thus create a share that has more votes (e.g. 1 share = 5 votes) or, conversely, fewer votes or a share without voting rights. The ZOK allows these options - it also allows you to issue a share without voting rights, you just must not withdraw the voting rights from all shares at once (at least one share with a vote in the company must be present). In practice, you can use this, for example, if you want to reward a strategic partner with a small share in the company, but you do not want to weaken your decision-making powers - you can give him a share without voting rights (he will be entitled to profits, but he does not interfere in the management).

 

• Adjusted profit share (dividend): the basic setting is that the profit is divided according to the size of the shares, unless otherwise specified in the articles of association. However, the shareholders can agree on different profit sharing options. A higher profit share for a particular share means that the shareholder in question will receive a larger percentage of the annual profit than would correspond to his or her contribution (for example, instead of 30%, he or she may be entitled to 50% of the profit). A preferential profit share ensures that the dividend is paid to that shareholder in preference - for example, by paying a fixed amount or percentage to him or her first, and the others split the rest. A fixed profit share is a special type where the shareholder is entitled to a fixed amount or percentage of the profits automatically, regardless of the vote of the general meeting. The ZOK even stipulates that in the case of fixed profit-sharing shares, there is no need for the general meeting to approve the profit payment each year - the shareholder is entitled to this "fixed dividend" directly by law. Is it also possible to have a share without the right to profit? Theoretically, yes - it is possible to imagine a share where the right to a profit share is expressly excluded. If you were to consider it (e.g. you want to give someone a share purely with voting rights but without a profit share), definitely consult a lawyer - such a provision must be worded with caution.
  
  
• Transferability of shares and pre-emption right: the ZOK regulates the transfer of shares in LLCs in quite detailed manner. Within the company (between existing shareholders) the transfer of shares is free - each shareholder can transfer his/her share to another shareholder without the need for the consent of the others. Externally (to a person outside the circle of shareholders) it is the other way round: the default rule is that the transfer of a share to a third party is only possible with the consent of the general meeting. However, the articles of association may change these rules. You can simplify the transferability (e.g. completely free transfer even to third parties without the necessary consent) or tighten it (e.g. requiring the consent of the general meeting even for transfers within the company). If you impose any restriction on transferability (e.g. prohibition of transfer within a certain year), remember that a transfer agreement concluded in violation of such restriction would be void. It is also advisable to include a pre-emption right in the memorandum of association: if a shareholder decides to sell his shares, he must first offer them to the existing shareholders on the same terms. The pre-emption right protects the remaining shareholders from the risk of the share falling into the hands of a stranger without their knowledge. Tip: If the share is completely freely transferable (without restrictions or consent), you can use the institution of a share certificate - this is a security representing the share. A share certificate makes the transfer of such a share much easier (it is sold in reverse form like shares), but it can only be issued in respect of a share whose transferability is not restricted.
  
  
• Other special rights attached to the share: In addition to votes and profits, you can also grant certain shares special privileges in the management and control of the company. These are usually provisions tailored to specific situations. For example, you can agree that the holder of a certain share has a veto right on certain key decisions - without his or her consent, the general meeting would not be able to decide on strategic issues (typically changing the articles of association, selling the business, etc.). Or a shareholder with a specific shareholding may have the right to appoint a member of the company's body (e.g. a managing director or a member of the supervisory board, if you have one). Another possible advantage is an extended right to information - the law gives each shareholder the right to inspect documents and accounts, but you may determine that one shareholder receives, for example, more detailed management reports or is entitled to consult with management beyond the legal obligations. Such individual rights are usually given to investors or partners who want to better protect their investment. Practical example: If a significant investor enters a firm with a minority stake, he or she may be given a stake with veto rights on major decisions and with a posting right to appoint a managing director to have control over management. The founders, on the other hand, can retain shares that guarantee that the company cannot be steered in a different direction without them. Good to know: although the right of veto or nomination of a member of the body is not explicitly mentioned in the law, it results from contractual freedom and is permissible - practice knows and uses it.
  
  
• Special share obligations: Not only rights but also obligations may be attached to certain shares. In addition to the basic obligation to repay the deposit, the articles of association may impose on the shareholders, for example, a so-called additional obligation - i.e., the obligation to make an additional financial contribution to the company beyond the deposit if the general meeting so decides (typically when the company needs additional capital). This obligation may be linked to only certain shares - the articles of association may specify which shares the surcharge is linked to. In practice, it may look like only the shares owned by the founders have a surcharge obligation (the founders undertake to "top up" the company if necessary), while the investor's share is exempt from this obligation. For any special obligations, it is essential that they are clearly and reasonably worded - they cannot be contrary to law or good morals.

Benefits and risks of different share adjustments

The possibility to define different types of shares gives the shareholders great flexibility. For example, you can incentivise investors with a guaranteed fixed profit share without having to hand over decision-making control to them. In turn, founders can maintain influence in the company by using shares with more voting power or a veto, even if they invite other shareholders. Different shares also make it easier to deal with situations where one shareholder contributes mainly labour and another mainly capital - each can have a 'tailored' share corresponding to their contribution. In the case of share transfers, properly set pre-emption rights and transfer restrictions ensure the stability of the ownership structure and prevent unwanted surprises when an outsider enters the company.

On the other hand, this freedom also carries risks and pitfalls. The more complex and non-standard arrangements you have in the articles of association, the greater the risk of ambiguity or disputes in the future. Every special right or obligation must be clearly defined - any gaps or ambiguities can lead to different interpretations and conflicts between the shareholders. Too much imbalance can also undermine relationships within the firm: if one shareholder has significantly limited rights (e.g. no voting at all or no share of profits), he or she may feel disadvantaged over time and look for a way to change the situation or leave the firm. Let's not forget the practical side: if you decide to bring in additional investors or sell shares in the future, an overly complicated share structure may discourage investors or slow down the process (it will require detailed legal due diligence and adjustments).

Benefit summary: The ability to customize shareholder rights allows you to set fairer terms for different types of shareholders, attract investment and maintain control of the firm. Summary of risks: Complexity can lead to misunderstandings and disputes, extreme limitations on rights can be invalid or problematic, and without expertise there is a risk that provisions in the shareholders' agreement will be worded unclearly or contrary to the law.

Contact our experts:

Conclusion

The adjustment of share types is a powerful tool, but it should be used with caution and with a full understanding of the legal implications. Every company is different and there is no one-size-fits-all solution - so it is advisable to discuss share adjustments with an attorney experienced in corporate law. An expert can help you assess which ideas are workable and legal, and which might come across. For example, he or she can confirm how to properly draft a fixed profit-sharing provision to comply with the OCC, or whether your intended limitation on transferability is valid. Have them review or create a customized shareholders' agreement - it will pay off. It will save you a lot of trouble in the future and avoid costly disputes or invalid arrangements.

Do you need advice on setting up the rights and obligations of partners in your company? Do not hesitate to contact our law firm. We will be happy to go over your shareholders' agreement with you, point out possible improvements or risks and suggest an optimal solution in accordance with the law and your business goals. Contact us today - together we will ensure that your LLC is on a solid foundation and enjoys all the benefits modern law has to offer.

Don't want to deal with this problem yourself? More than 2,000 clients trust us, and we have been named Law Firm of the Year 2024. Take a look HERE at our references.