As flexible business structures become more attractive for investors and entrepreneurs, Variable Capital Companies (VCCs) are gaining ground in European jurisdictions. These structures offer adaptability in terms of capital contributions and profit distributions, making them a preferred choice for startups and investment funds.
Whether you’re forming a VCC or advising on one, it’s essential to ensure that the articles of association are clearly drafted and legally sound. Below are the key clauses you should not overlook:
Clause for Issuing and Redeeming Shares
Set out clear terms regarding how and when the company may issue new shares or redeem existing ones. This helps prevent internal conflicts and ensures that share capital management aligns with the company’s long-term objectives.
Conditions for Transferring Shares
Include procedures and restrictions on the transfer of shares. For instance, must shares be offered to existing shareholders before being sold to third parties? Pre-emption rights and approval procedures should be clearly defined.
Rights and Privileges of Different Classes of Shares
Clearly outline the rights attached to each class of shares. This may include:
- Voting rights
- Dividend rights
- Entitlements upon liquidation
Defining these rights protects shareholder interests and supports transparent governance.
Exit Mechanism for Shareholders (Exit Clause)
Include a well-defined exit strategy for shareholders. Detail how shares will be valued, under what conditions a shareholder may exit, and what process will follow their departure. This clause can prevent disputes and ensure fairness in transitions.
Management and Decision-Making
Clarify how decisions are made—whether through a simple majority or a qualified majority. Establish rules for decision-making deadlocks or disputes. A clearly outlined governance model contributes to smoother operations.
Capital Increase and Reduction
Specify the procedures for capital increases or reductions, and whether such changes affect the equity balance among shareholders. Ensure automatic adjustments are addressed, especially in companies with dynamic equity participation.
Profit Distribution
Explain how the company’s profits will be allocated. Will this be proportional to each partner’s shareholding, or based on another formula? Consistency and transparency here are key for maintaining shareholder trust.
Rights Upon Liquidation
State how assets will be distributed in case of company liquidation. Address priority of claims and distribution hierarchy to ensure clarity and fairness in the dissolution process.
Why It Matters
Including these clauses ensures the smooth operation of the VCC and offers legal protection to all parties involved. Inaccuracies or omissions can lead to disputes, mismanagement, and potential financial loss.
If you’re setting up a Variable Capital Company or reviewing your current articles of association, it is strongly recommended to seek professional legal guidance.
Gabriela Ivanova is a corporate and commercial law attorney with years of experience in advising clients on company formation, restructuring, and shareholder relations. As the founder of Ivanova Legal Solutions, she helps entrepreneurs and investors navigate the complex landscape of European business law.
Need assistance drafting or reviewing your VCC’s articles of association?
Contact us at givanova@ivanovalegalsolutions.com
