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Company law

Depositary receipts for shares

The issue of depositary receipts for shares in the capital of a BV (private limited company) or NV (public limited company) is a way of separating the controlling rights (voting rights) conferred by those shares from the economic interests (dividend and value development) they represent. This is achieved by transferring the shares to a trust office, usually a trust office foundation created specifically for this purpose. The trust office foundation then issues depositary receipts for those shares to the original shareholder.

 

The trust office foundation, acting through its Board, exercises the voting rights attached to the shares. The depositary receipts represent the economic interest. If this is done properly, the depositary receipts are recognized as equivalent to the shares for tax purposes, and the original shareholder will still be deemed to be the shareholder from a tax perspective.

 

The issue of depositary receipts is often a useful means of ensuring the continuity of a company, for example after the death of its founder. One or more heirs take his or her place on the Board of Directors while all the heirs receive a proportional share of the value. In some cases, however, it is better if none of the heirs have any say in the board room.

A system of non-voting shares often falls short of achieving the desired balance.

 

In some instances, an owner might opt to transfer some of the financial value of the organization to the next generation while he is still alive. In this context, depositary receipts form an excellent estate planning instrument.

 

The depositary receipts system is also widely used in the context of employee participation. In that case it remains desirable for some decisions to be made by the General Meeting of Shareholders without any staff input. In most cases, it is also desirable to ensure that employees are not able to block the planned sale of the company. An agreement which compels employees to sell their shares is unlikely to be effective.

 

Please contact us for further information and advice about depositary receipts, business succession within the family and employee participation arrangements.


 


 

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