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Reclassification Plan Benefits Client and Its Shareholders

Our client, a comparatively small but highly successful and much-beloved sport venue—in an extremely competitive industry—had enjoyed a growing level of stock ownership by the aficionados of the industry for many years. However, with its tangible assets appreciating in value over the years and stock ownership expanding, it was becoming increasingly difficult to avoid the requirements of SEC registration, an onerous and expensive process that would add significant expense and competitive disadvantage, thus threatening the stability of the organization. Further, because the shareholders had always been significantly enfranchised, they felt a personal sense of ownership that precluded changes that would affect their status as shareholders.

Mechanically, the simplest way to avoid SEC registration might have been to effect a reverse stock split, which would have been unacceptable to the client due to the cost and the resulting disenfranchising of many loyal shareholders. Therefore, our solution was to create two classes of stock and keep the number of shareholders of each class below 500. However, the challenge was to sustain the shareholders’ perceived ownership value of the new shares. Our team therefore worked with the board of directors to develop a recapitalization plan with two classes of stock with distinct differences, but with each class having sufficient rights to satisfy owners. The plan also included protections to inhibit either class from exceeding the limit on the number of shareholders, which would lead to SEC registration. We helped develop an informational campaign, first bringing on board concerned directors and then educating shareholders on the need for the change through a plain-English proxy statement and informational meetings to answer questions in an understandable manner. Ultimately, the recapitalization passed with overwhelming shareholder support, the client was spared the cost and disruption of SEC registration, and everyone got back to the serious business of enjoying the venue's activities and events.