Shares can come in different types, or classes. Your limited company can create different classes of shares according to the benefits, voting rights and other conditions you want to assign to different groups of shareholders.
Why have different classes of shares?
The majority of companies only have one type of share, usually known as ‘ordinary’ shares.
These ordinary shares are created when the company is first incorporated, and the rights attaching to the shares are described in the Articles of Association of the company and conferred by law.
Ordinary shares come with the following bundle of rights automatically attached to them:
- The right to vote on resolutions of the company members
- An equal right to dividends as other shareholders
- The right to receive a share in the assets of the company when it is wound up
A company’s owners may decide that they would like to divide its ordinary shares into classes, so that certain shareholders have different rights from others, or that the rights shareholders might otherwise have as company members be restricted, for example the right to vote.
The usual reasons for creating different share classes are:
- To attract investors by giving them enhanced rights
- To give certain members, such as founding members, enhanced voting rights so that they can continue to exercise a high degree of control over the company as it grows
- To prefer certain shareholders over others because they contribute in a different way to the running of the company
- For tax reasons
- To allow shareholders the right to share in company profits, but not have a say in the way the company is run
It’s particularly common to see different classes of share when companies offer employees shares as an incentive to work hard and participate in any increase in the value of the company as a result. However, you might not want these employees to receive dividends or have any say in the way the company is run.
Here are some of the ways in which shareholder rights can be varied:
- You can give certain shareholders a preference over others in some way, for example the right to receive a dividend, the amount of the dividend, or the right to receive capital when the company is wound up
- You can defer certain shareholders’ rights to receive dividends or receive a return of capital, until other shareholders have been paid
- You can remove shareholders’ rights to vote, or give them extra or enhanced voting rights, or prevent holders from attending the annual general meeting of the company
When you create difference share classes, these are usually labelled so they’re simpler to describe and allocate. Often these are numbered ‘A’, ‘B’, ‘C’ and so on, commonly referred to as ‘Alphabet’ shares.
The rights attaching to different share classes can be identical, or they can be different in some way. You set out the rights attaching to classes of shares in the Articles and also in a shareholders’ agreement.
When shareholders’ rights are held back in relation to others, for example the right to receive dividends, these are referred to as ‘deferred shares’. When holders’ rights are given priority over others, these are referred to as ‘preferred’ or ‘preference’ shares.
A guide to the different classes of shares
Shares can vary in the following kinds of ways:
|Ordinary shares||These have no particular rights associated with them over and above the right to receive dividends, votes and to a return of capital on a winding up. Their ranking in terms of these rights may drop below those of other shareholders if different classes of shares are issued.|
|Dividend rights||This class of shareholder may have the right to receive normal dividends, a dividend before other classes of shareholder, a set amount or enhanced dividend, no dividend at all, or a dividend only in certain circumstances. If a shareholder has preferred right to receive a dividend, this is usually expressed as a percentage of the nominal value, for example a £1 5% preference share will get 5p per share ahead of holders of ordinary £1 shareholders.
Sometimes dividend payments are missed or reduced, and if you want to give some shareholders the right to ‘roll’ up their rights to missed dividends so they are paid before others when dividend payments return to normal, these are called ‘cumulative preference’ shares
|Right to share in the company’s capital on winding up||If a company is wound up (closed down), and its assets are sold, any funds are first paid to creditors and then the shareholders. If you create different share classes, certain shareholders may have the right to be paid before others.|
|Voting rights||Certain classes of shareholder may not be able to vote in company meetings, or alternatively may have extra votes. It’s also possible to give weighted voting rights on certain matters affecting the company.|
|Redemption rights||Shares with redemption rights can be bought back by the company in the future, for example at a certain date or during a certain period, either at the price they were sold or at a different price. If a company issues redeemable shares, it must retain some share capital as non-redeemable shares.|
How many different types of shares can your company have?
You can create as many classes of shares as you like. You won’t, however, create different classes of shares just by dividing them up into blocks and giving them different names. Equally, if you create shares with different rights to others, you will be creating different classes of shares by default.
Shareholders’ agreements and different share classes
When creating different share classes, it’s common for the shareholders (and the company) to enter into a shareholders’ agreement to fix their rights in place and to describe how the company will be run. A shareholders’ agreement typically covers the following matters:
- How the company’s affairs will be managed
- When meetings will take place, and the decision-making process
- What decisions of the directors, if any, will require the consent of certain shareholders, for example borrowing money or selling assets
- How directors are appointed and removed, and who has a say in this
- How the rights of minority shareholders will be protected
- Rules around the sale or transfer of shares – to whom and at what price for example
- A mechanism to resolve disputes where there are equal voting rights
Converting shares between different classes
Where you have decided you want to create classes of shares, or where you want to convert existing classes of shares, for example, you are transferring shares between individuals who have, historically, held shares of a different class, or you are selling the company and the selling shareholders hold different classes, you will need to obtain the consent of the shareholders, and follow a certain process, as follows:
- Pass a resolution to create, designate, name, or re-designate the share class
- If you need consent from other shareholders for the change, obtain that consent, and follow any other procedures required by the articles and/or shareholders’ agreement
- Amend the articles of association to reflect the changes
- File notices with Companies House about the change of name or designation and the variation of any rights, and file a copy of the articles of association and any special resolutions that have been passed
You will also need to update the register of members, and issue (or cancel) share certificates.