Why structure decides so much
Structure is the area where the most avoidable damage occurs. A strong business with a confused ownership structure will spend months and considerable expense untangling arrangements that were convenient when they were created and are obstacles now.
The requirement is not elegance. It is that the structure can be documented, explained and defended to a regulator, an auditor and an investor.
A single clear parent
The entity that becomes public should sit at the top of the group and hold the operating businesses and assets beneath it. Structures where assets are distributed across entities under common personal ownership, without a corporate parent, must generally be reorganised before a transaction can proceed.
That reorganisation has tax consequences for the company and its shareholders. It is planned, not improvised.
The share register
Every share in issue must be traceable to a documented issuance or transfer, with consideration received and recorded. The problems we see most often:
- Shares issued for services with no valuation and no board resolution
- Transfers recorded in correspondence but never in the register
- Options granted verbally, or granted under a plan never formally adopted
- Convertible instruments with conversion terms that are ambiguous or that conflict with one another
- Nominee holdings where the beneficial owner is not documented
Each of these is fixable. Each takes time, and several require the cooperation of people who may no longer be involved with the company.
Shareholder count and distribution
Exchanges apply minimum public distribution requirements — a minimum number of holders and a minimum proportion of shares in public hands. A company whose entire register consists of founders and two institutional investors will need to address distribution as part of the transaction, usually through a concurrent financing.
At the other extreme, a company with several hundred small shareholders acquired informally may face its own difficulty: documenting that each of those issuances complied with the securities law in force at the time.
Founder ownership after the transaction
Founders frequently focus on retaining majority control. It is worth understanding the arithmetic early: the vehicle's existing shareholders retain a position, a concurrent financing dilutes everyone, and escrow arrangements will restrict when founder shares can be sold.
Escrow is a standard feature, not a penalty. It exists so that the people presenting the business remain committed to it. A founder who is unwilling to accept escrow restrictions should reconsider whether public status suits their objectives.
Shareholders' agreements
Private shareholders' agreements typically contain provisions incompatible with a public share register — pre-emption rights, transfer restrictions, drag-along and tag-along mechanics, board appointment rights and veto powers.
These generally terminate on a transaction, but the termination must be agreed by the parties. A shareholder with a veto right and a grievance can hold up an entire process, which is why identifying these provisions early is a priority.
Related-party arrangements
Loans from founders, property leased from a director's company, services provided by a relative's business — all common in private companies, all requiring disclosure and, in a public company, independent approval.
The right approach is to identify every related-party arrangement, document it at arm's length terms or terminate it, and disclose what remains. Attempting to obscure these arrangements is both ineffective and damaging.