Agreeing to bring someone into your company can feel fairly straightforward. You agree how much they will invest, settle on a percentage and ask your advisor to prepare the documents.
There is quite a lot contained in that percentage, however. It says very little about where the money goes, whether the existing shares have been paid for, or what the incoming shareholder will actually be entitled to do.
Following my earlier article on preparing to incorporate in Cambodia, I wanted to look at some of the questions worth discussing when ownership changes. The Law on Commercial Enterprises provides useful flexibility, including the ability to create different classes of shares. Taking advantage of that flexibility requires a little more thought than simply adding another name to the company documents.
First, establish what the investor is actually buying
An existing shareholder selling part of their holding and the company issuing new shares are different transactions.
With a sale, the purchase price ordinarily goes to the selling shareholder. With a subscription for new shares, the contribution goes into the company. A transaction can include both, but the allocation should be clear from the beginning.
If the purpose is to fund expansion, consider how much money will actually remain available to the business after completion. Paying an existing owner for their shares will not, by itself, give the company additional working capital.
I would start with a simple ownership table showing the position before and after the transaction, alongside a breakdown of who pays what and who receives it.
Take paid-up capital seriously
Before discussing a new investment, establish what the existing shareholders have already contributed.
Article 146 of the Law on Commercial Enterprises requires shares to be fully paid before they are issued. Payment can be in money, in kind or, for a private company, past services. The provision does not make a promise to perform future work the same thing as services already provided.
This matters where the arrangement is that someone receives shares now and contributes their money or expertise later. That proposal needs structuring advice before the shares are issued.
For existing shares, I would want the company documents, accounting records and evidence of contributions reviewed together. A capital figure appearing in the documents does not, on its own, establish how payment was made. Equally, money transferred by a founder may have been recorded as a shareholder loan rather than equity.
Where the contribution is an asset, establish what is being transferred, whether the contributor owns it and how its value has been determined. Article 146 places responsibility for valuing contributions in kind and past services with the directors. Article 146, unofficial English translation.
There is also a practical distinction between capital having been paid and the company still holding that amount in cash. The business may have spent properly contributed funds on its operations. An incoming investor needs to understand both the contribution history and the company’s current financial position.
The company’s capital is not its valuation
The price an investor is prepared to pay depends on the business: its assets, liabilities, contracts, prospects and risks. It does not follow automatically from the capital recorded in the company documents.
For example, if an investor subscribes $100,000 for 20% of the company after the investment, that implies a $500,000 post-investment valuation in a straightforward transaction with equivalent shares. The parties should understand that calculation before asking an advisor to implement it.
Then separate out any shareholder loans. Are they remaining outstanding, being repaid from the investment or being dealt with another way? An investor may take a very different view of the deal if a substantial part of their contribution immediately goes back to the founder.
Consider whether everyone should hold the same shares
Cambodian company law allows more than one class of shares. Article 145 requires the rights, privileges, restrictions and conditions of each class to be set out in the articles.
This allows the parties to consider different voting and economic rights, including preferences relating to distributions or the remaining assets on liquidation. Those rights need precise drafting. Calling something a “preference share” does not explain what preference it carries. Articles 143–145, unofficial English text.
A founder continuing to run the business and an investor contributing capital may have different priorities. Discuss those priorities before deciding whether separate classes would help.
For example, does the investor want a say in ordinary management, protection over a few major decisions, or priority in receiving a return? Those are different requests and may require different arrangements.
I would also be cautious about adding complexity without a clear purpose. One class of shares may be entirely appropriate. The point is to make that choice deliberately.
Agree how the company will operate afterwards
Share ownership, board representation and day-to-day management should each be discussed.
Who approves the budget? Who can commit the company to significant borrowing? What information will the investor receive? Will a working shareholder receive a salary as well as any dividends?
The articles and any shareholders’ agreement should be prepared together so that the agreed arrangements work consistently within Cambodian law. Class rights belong in the articles; a separate agreement should not be treated as a substitute for getting the company’s constitutional documents right.
Before promising shares to an incoming investor, check existing rights too. Article 151 addresses pre-emption rights on new issues where the articles provide for them, whilst Article 154 makes transfers subject to legal and constitutional restrictions. Existing agreements may also need to be considered. Articles 151 and 154.
Discuss the next funding round and an eventual exit
Whilst everyone is usually focused on getting the present investment agreed, I would spend some time on what happens afterwards.
If the company needs more money next year, is everyone expected to contribute? If one shareholder cannot, what should happen to their percentage? If a shareholder wants to leave, who should be able to buy their shares and how will the price be determined?
Be particularly careful about promising that the company will buy someone out whenever they wish. Company purchases and redemptions of shares are subject to statutory restrictions, including financial safeguards under Article 155. An exit arrangement needs a workable buyer and funding mechanism. Article 155.
Give your advisor a useful starting point
You do not need to resolve every legal question before taking advice. I would, however, prepare a short note covering the proposed investment, ownership split, contributions, management roles and any points still under discussion.
Provide the current articles, shareholder records, existing agreements, recent accounts and details of shareholder loans. Flag any land ownership, regulated activities or significant contracts that could make a change of ownership more sensitive.
Ask your advisor to map out the approvals, documentation, payment arrangements, filings and tax work, distinguishing what happens at signing from what must happen at completion.
My view is that the most useful preparation is being clear about the arrangement you actually want. That gives your advisor the opportunity to identify problems early and prepare documents that reflect how you intend to own and run the business.
If you are considering bringing a shareholder into a Cambodian company, please feel free to contact me or send me a message here on LinkedIn.