University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

175

Pages:

1
Author:

bratrochanter

To establish an equity structure for the corporation that aligns with the desires of the four primary investors, the IT engineer, and the general manager (GM), the corporation can use two classes of shares: Class A and Class B. 1. Class A Shares: These shares are issued to the four associates. Each associate receives an equal share of Class A stocks (22.5% each, totaling 90% collectively) and retains full voting rights, allowing them to elect all members of the board of directors and control significant business decisions. 2. Class B Shares: These shares are issued to the engineer and the GM, each receiving a 5% equity stake. Class B shares grant equity interest but limited or no voting rights, meaning the engineer and GM do not participate in electing the board but still benefit from the corporation's financial success. Alternatively, Class B shares could be given restricted voting rights on select matters that impact their roles, such as compensation, while excluding them from general board elections. Advantages of Using Classes of Shares Over Cumulative Voting:    Absolute Control for Primary Investors: By using separate share classes, the four associates retain absolute control over the corporation’s board without risk of dilution of their decision-making power. With cumulative voting, minority shareholders (like the engineer and GM) could potentially elect a director if they pooled their votes, which the associates wish to avoid. Clear Delineation of Roles: Class B shares with limited or no voting rights reinforce that the engineer and GM are involved primarily for their expertise in IT development and business management, not governance. Equity Incentives Without Governance Power: Granting Class B shares ensures that the engineer and GM feel invested in the corporation's success while keeping governance decisions with the primary investors. This share structure fulfills the associates’ desire for control while offering the engineer and GM equity participation in the business's growth and success.