Forms of Participation in the Company and Investment Valuation
Are you considering investing your funds in a company to enhance your investment or share in profits, but are unsure of the method? We have prepared a simplified overview of traditional forms of participation in a company for you. For specific procedures, we will evaluate their benefits and challenges. You will then determine which option is the most advantageous for you.
If you are also interested in specific forms of participation, you can find them in this article here Specific Forms of Acquiring Participation in a Company.
Share in the Company
The fundamental form of participation in a company is a business share. This represents a partner's participation in a business corporation, which entails rights and obligations arising from this participation. Regarding rights, it primarily includes the right to vote on the most significant matters concerning the company (within the highest authority – the general meeting) and the right to a share in profits. As for obligations, it mainly concerns the liability of partners – however, in the case of a limited liability company, this is limited to the amount of unpaid contributions.
By transferring the share, the acquirer becomes the owner of the share and acquires all rights and commits to the obligations of a partner. To transfer a business share, it is necessary to conclude a written share transfer agreement and ensure official verification of the signatures of both parties. Subsequently, it is necessary to register your name as a new partner in the commercial register, where your personal data (name, date of birth, and residence) will be published.
Share Certificate
In some limited liability companies, the business share may be associated with a so-called share certificate – a security that serves as proof of your ownership in the company. However, this is not common practice. The company must explicitly state this option in its articles of association.
In addition to the rules on share transfer, the rules for the transfer of securities will also apply – beyond concluding the agreement and handing over the share certificate, it is necessary to transfer the share certificate by endorsement, in which you must be specified as the acquirer of the security (without endorsement, the share transfer will not be valid!). For the effectiveness of the transfer of the share certificate, it is also necessary to present it to the company.
The advantage of embedding the share in a share certificate is the ease of transferring the share, as it is transferred by endorsement like a security. There is no need to draft complex contracts. This feature makes share certificates attractive for those who want the ability to easily and quickly change the ownership of the share.
Joint-Stock Company and Shares
A similar situation to the share certificate occurs in a joint-stock company, where the share in the company is always represented by a security (share).
The transfer of shares varies depending on the type and form. Below we outline the basic overview:
Registered Shares
These are securities that are transferred by contract and endorsement at the moment of delivery. Their transfer cannot be excluded, but can only be limited by the articles of association.
Restrictions on transferability provide the company with several advantages. They allow control over the ownership structure, as the company can prevent undesirable individuals from entering among the shareholders. They are particularly suitable for family businesses or smaller companies that want to maintain a stable and vetted circle of owners. They bring greater transparency, as owners are recorded in the shareholder register, which facilitates communication and the exercise of shareholder rights. Restrictions on transferability also protect specific rights associated with shares, such as the right to appoint a member of the governing body, and contribute to the stability and predictability of ownership relations overall.
Bearer Shares
These take the form of securities to bearer and can only be issued as book-entry or immobilized securities. For this reason, ownership rights to bearer shares cannot be acquired by contract, but ownership rights to book-entry shares are acquired by registering the book-entry security in the relevant register. Bearer shares are freely transferable.
The unrestricted transferability ensures high liquidity, which is particularly advantageous for investors who want to easily enter or exit the company. The transfer of ownership rights by registration in the register is quick, secure, and administratively uncomplicated, facilitating trading on regulated markets. The form of book-entry or immobilization also contributes to greater transparency and security of ownership, as ownership is recorded with a central depository or another custodian. This also reduces the risk of fraud or loss of physical documents. This type of shares is particularly suitable for larger companies with a wide circle of shareholders and ambitions to access capital markets.
The position of a shareholder differs from that of a partner in a limited liability company. Shareholders typically have a smaller role in the actual operation of the company and are not recorded in the commercial register (except in the case of a sole shareholder) – thus, ownership of shares is not public, unlike ownership of a share in a limited liability company.
What to Remember Before Investing: Influence, Profits, and the Role of an Expert
In conclusion, before deciding on a specific form of investment, consider not only the legal and financial aspects but also the degree of influence you wish to have in the company. A well-chosen structure and thoughtful contractual setup can provide you not only with a share in profits but also stable and trouble-free cooperation with other partners.
If you are unsure which procedure is most suitable for you or how to properly set up the contractual documentation, we recommend consulting an expert – a lawyer or tax advisor.