Voting rights explained

When you buy shares in a business, you typically get voting rights in key decisions the organisation needs to take.

Often this is quite straightforward. The amount of votes you get are proportional to the number of shares you own and you simply exercise your right to vote directly during meetings or via polls.

This set-up can work well for smaller companies, especially those with relatively few shareholders.

But as organisations grow, funding is sought, and more investors are brought on board, there can be good reasons to want to streamline your operations – if only to keep your cap table clean and to ensure strategic decisions are made as efficiently as they can be.

This is when the separation of legal ownership and beneficial ownership can be useful.

But what happens to your voting rights when shareholder arrangements are created like this, where the legal owner and the beneficiary are different named entities?

What happens when nominees are used?

What happens to your individual voting rights if you become a member of a shareholder syndicate, a Special Purpose Vehicle, or a Roll-up Vehicle?

Voting rights as a beneficial owner

When it comes to investing in businesses, we often see the phrase beneficial owner used interchangeably with shareholder.

The beneficial owner is the actual owner of a share. They are the person who would ultimately receive a dividend from the sale of that share. And they often have the right to vote on company decisions.

As we have touched on above, this might mean one share = one vote. But this isn’t always the case.

Individuals holding preferred shares may have enhanced voting rights. While some organisations offer non-voting shares as a way to gain investment but not dilute control of the company.

Voting rights, legal owners and nominees

Separating legal owners from beneficial owners can be useful for businesses.

It can provide a level of privacy for the beneficial owner. And consolidating a group of shareholders behind a single name can simplify your cap table, making it easier to manage internally, and easier to peruse quickly by other would-be investors.

Technically speaking, a legal owner and beneficial owner can be the same person. But usually, a legal owner is used to discern a different entity that wouldn’t itself benefit from the sale of the shares in question.

Nor would they typically have any voting rights. They’d simply be a separate person or entity named as the owner of the shares on the share register and Companies House.

They may also be known as a nominee. I.e. the registered owner of a share acting as a representative of the beneficial owner.

Nominees exercise the rights and obligations of share ownership as instructed by the beneficial owner. This may, of course, include voting. But they would only vote as the beneficial owner tells them to.

Voting rights and SPVs

Special purpose vehicles (also known as SPVs) are separate legal entities created for specific business purposes.

SPVs can be used by groups or syndicates of investors. They are created under a new legal name, which provides extra privacy for existing shareholders and keeps the number of names on the cap table to a minimum.

SPVs formed from a group of shareholders often contain lead investors and follow-on investors.

The lead investor will source the deal, negotiate its terms, and will bring the other follow-on investors into the syndicate.

Where voting is concerned, follow-on investors usually pass on their voting rights to the lead investor as a proxy. The lead may vote themselves, most likely in the best interest of the SPV and their investment, but they may also use a nominee.

This can work a little differently if they aren’t a regulated fund manager, where all investors still retain a say in the voting and management of their shares.

Voting rights and RUVs

Roll-up vehicles (RUVs) are a specific type of SPV – specially designed to roll multiple smaller investors into a single entity.

Again, the benefits here are:

• A simpler, cleaner cap table

• Streamlined communications

• More efficient decision-making

As with SPVs and lead investors, part of the added efficiency of an RUV comes from consolidating voting power through a single representative.

While this may look like the loss of voting rights for individual investors, the benefits of the RUV – where decisions can be made quickly and the shareholder structure can be presented more cleanly on the cap table – tends to outweigh the negatives of losing some voter power.

Efficiency can outweigh full shareholder voting

Voting rights within a company can be a big deal for shareholders.

Some potential investors may be keen to help fund the next phase of growth for a company because they want to have a stake in how it evolves.

But there are plenty of scenarios where shareholders don’t feel the need to vote on things like strategy, hiring directors, or approving dividends.

Voting on such matters can take a considerable amount of administrative time, especially for investors who already have a sizeable portfolio.

Likewise, it can benefit both the investors themselves and the business as a whole, if voting decisions can be made quickly and efficiently.

Where SPVs and RUVs are used, investors can find themselves with more funding clout and negotiating power by pooling their resources in the first place. 

The investment opportunities afforded to a shareholder as part of a syndicate might be better than what is available to them as an individual, even if it means not having voting rights within the organisation they ultimately invest in.

The key thing for managers to remember is that they have options.

Whether you’re considering setting up a nominee structure or using an SPV, such as an RUV, it’s all possible on the Vestd platform. Get in touch!