A Helpful Tool for Succession — Closely Held Companies and Preferred Stock Designing

There are many tools for asset succession, and with recent revisions to corporate laws, preferred stock has become a common tool for family business succession. Currently, private companies can issue various types of preferred stock with different terms to achieve the goals of family business succession and oversight. Common designs for preferred stock include:

Veto Power Preferred Stock 

Shareholders holding veto power preferred stock can exercise their veto rights to have the final say on company governance proposals. However, according to the Ministry of Economic Affairs' interpretation, veto power preferred stock can only be exercised on matters resolved at the shareholders’ meeting, not at the board meeting. This legislative intent is to maintain the company's normal operation. For example, the results of board elections fall under board meeting, and shareholders holding veto power preferred stock cannot use their veto rights to overturn board election results.

Dual Voting Right Preferred Stock 

By designing dual voting rights, certain shareholders can gain voting advantages, thereby ensuring that these shareholders have power over company governance at shareholder meetings. In practice, dual voting rights preferred stock and veto power preferred stock are often designed for the most important family members or founders. By granting multiple voting rights on shareholder matters, founders or key shareholders can lead the company’s operations and have veto rights over decisions made by inexperienced managers to maintain good corporate governance.

Dividend and Bonus Distribution Preferred Stock 

Preferred stock can also be designed to provide certain shareholders with priority dividend or bonus distribution rights, or rights to fixed or variable dividends. This type of preferred stock is typically used for family members who are not involved in the management of the family business. A common example is that a family business founder issues such preferred stock to children who are not involved in running the business, allowing them to maintain priority dividend rights even if other family members try to deprive them of this right through shareholder resolutions or other means.

Guaranteed Board Election Preferred Stock 

If there are concerns about potential factional disputes in the future, a special class of preferred stock can be issued that guarantees a certain number of board seats. This ensures that shareholders holding such preferred stock will be guaranteed election to the board, helping achieve the company's governance goals.

Preferred Stock with Closely Held Companies 

In practice, to keep family business ownership concentrated within the family and prevent the dilution of control due to ownership being spread out, closely held companies are often used to achieve this objective. However, the regulations of closely held companies stipulate that the number of shareholders cannot exceed 50. If the number of shareholders exceeds this limit, such as due to inheritance, the company must amend its registered status from a closely held company to a regular company, losing the concentrated ownership feature of a closely held company.

When establishing a closely held company, reasonable provisions for share transfers and inheritance can be included in the company's articles of incorporation. This ensures that if an heir who does not wish to participate in the company’s operations inherits shares, the shares can be transferred according to the company's articles. Additionally, the shareholding structure of a closely held company can be combined with preferred stock design, allowing shareholders holding preferred stock to achieve company governance goals, while the characteristics of the closely held company help maintain concentrated family ownership.

The design of preferred stock and closely held companies requires consideration of the overall management willingness of family members and legal regulations. Incomplete or flawed equity structures can easily lead to family disputes in the future. It is recommended to consult a professional accountant to understand the relevant regulations.