Capital Gain Fraction
The Capital Gain Fraction is the fraction of the Capital Gain that is used to calculate the issue of Member Shares to Labour and User Shareholders. By default, this fraction is set to 0.5. Member Shares capture the value added in a given year to the enterprise by currently active Labour and User Shareholders. The value is allocated to them by either redeeming the investor share accounts of current/former members and transferring ownership to existing Labour and User Shareholders, or issuing new Investor Shares to them.
A Capital Gain Fraction of 1 would have the effect of allocating all capital gains to Labour and User Shareholders and pay no dividends to existing Investor Shareholders. However, the shares would then have no value (because no capital gains are allocated to increase their value).
A Capital Gain Fraction of 0 (zero) would have the effect of distributing all capital gains to existing Investor Shareholders and prevent Labour and User Shareholders from acquiring any Member Shares.
As financial modelling shows that any deviation from 0.5 immediately triggers substantial wealth transfers from one shareholder group to another, it is not only recommended that this fraction remain at 0.5 but also that members consider changing it to an ‘entrenched clause’ when incorporating under UK Company Law. The Capital Gain Fraction can be made into an ‘entrenched’ rule by specifying at incorporation that 100% of shareholders on a one-member, one-vote basis need to agree a change. This has the effect of 'hard-wiring’ the 0.5 (50%) fraction into the FairShares Model.
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