EIS Compliant Liquidation Priority provision
This product constitutes a liquidation priority provision that we managed to insert into one of our client’s articles of association and complied with HMRC’s strict SEIS and EIS rules. Please note that if you would like your articles to contain such a provision and you would like the provision to comply with HMRC’s SEIS and EIS rules we would recommend one of the following:
1) Before filing the articles at Companies House, submit an advance assurance application with HMRC providing the amended articles along with a detailed explanation of why the liquidation priority provision satisfies HMRC’s risk-to-capital condition. Even if you already have advance assurance it will be important to make sure that HMRC are happy with the provisions contained within the articles. Although we were successful with such a provision for one of our clients, there is no guarantee that HMRC will reach the same decision (especially as there is no guidance on the matter); or
2) If the investors are happy to proceed with the investment without obtaining advance assurance make sure that HMRC are aware that, where the provision doesn’t satisfy their SEIS and EIS criteria, the investors shares will revert to ordinary shares that won’t be able to benefit from such a provision.
Below we explain the practical impact of such a provision along with the areas where your input will be required on the template.
The idea behind this provision is that the A ordinary shares are held by the investors and the founders hold ordinary shares. Upon a share sale, if the proceeds you expect to receive per equity share is a relatively low figure then these proceeds get shared between all of the shareholders (both A ordinary shareholders and ordinary shareholders). However, until their investment money is repaid the proceeds are split so that the A ordinary shareholders receive 99.5% (or whatever figure you wish to insert) of the proceeds and the ordinary shareholders receive 0.5% (or whatever figure you wish to insert). Once their investment monies have been received in full, the remaining proceeds will be distributed pro rata between the ordinary shareholders.
Where the expected proceeds per equity share are of a significant value (whatever you decide) then the proceeds will be distributed between all equity shareholders pro rata in accordance with the number of shares held.
Where your input is required on the template
By way of summary, you will need to insert or amend the following information:
- The company name;
- The date the articles were passed by special resolution;
- The nominal value of the A ordinary shares;
- The liquidation priority provision’s article number;
- The nominal value of the ordinary shares; and
- The subscription price for each A ordinary share.
- The maximum figure with which you wish the liquidation priority provision to apply;
- The percentage of the proceeds to be split between the A ordinary shareholders and the ordinary shareholders; and
- The amount per equity share where, if the proceeds per equity share are greater than that amount, you wish the liquidation priority provision to no longer apply.