It is important to ensure that share capital is dealt with correctly and that associated class rights are properly recorded and documented. This will help to avoid potential disputes in relation to important issues such as voting rights and dividend payments.
What are classes of shares and when may the need for them arise?
Many companies will only have one class of shares, meaning that all of those with a share in the company will have the same rights allocated to them.
The need for different classes of shares may arise where it is necessary for some shareholders to enjoy different rights to others, as outlined below.
Ordinary shares
Ordinary shares are the most common type of share and these are generally awarded to shareholders where no other class of share is created. These allow the holder to share in any dividend declared and also to a share of the capital should the company be wound up. These are very often used in start-ups and family businesses as they:
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- assist in ensuring that all shareholders enjoy the same voting rights and entitlement to dividends in proportion with the size of their respective shareholdings; and
- ensure a simple and easy to understand means of apportioning ownership of the company.
Preference shares
Preference shares, as the name suggests, usually take precedence over other shares in respect of dividends. Often however, these shares limit the voting rights of the holder. These are usually issued in situations where a third party is investing in a company without getting involved in its general management. This type of share will therefore allow the company to;
- raise money through investment, without the need to sacrifice control;
- raise money from investors, rather than taking a loan, to reduce debt; or
- facilitate growth by attracting investors who will be entitled first to any profits of the company.
Deferred shares
Deferred shares, which often do not allow the holder to receive dividends until certain objectives have been achieved, or until a certain amount of time has passed. This class of share can be used to incentivise and retain key company executives by:
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- rewarding them by delivering bonuses in shares rather than cash; and
- ensuring that such rewards are conditional upon their remaining in employment until the end of a certain period.
Frequently, a company will allocate different classes of shares called ‘A’ shares and ‘B’ shares etc, with the rights attached to those shares being set out in the articles of association of the company or in a separate document, such as a shareholders agreement. More bespoke rights can therefore be crafted to suit the bespoke needs of your company.
In order to allocate a new class of shares correctly, it is important to ensure that the rights attached to those shares are properly recorded and that the correct administrative procedures are followed. For this reason, the assistance of a commercial lawyer will be invaluable.
For example, it is necessary to file with Companies House details of any share designation within one month along with an explanation of the rights attached to those shares.
Restructuring your company’s shareholding might be useful
Issuing different classes of share to new investors or potential business partners can ensure that you retain the ultimate control of your business by attaching clear voting rights to each class of share.
You can ensure that voting rights are tailored to ensure that important decisions are not taken out of your hands.
A careful structuring of the shareholding of your company can also assist in managing the way that dividends are apportioned and can assist in protecting your capital contribution to the company on incorporation.
The importance of instructing a lawyer
Any new classes of share, created for the benefit of your company, should be tailored to address the objectives they seek to achieve. As specialists in commercial law, we can assist you in this whilst providing detailed advice along the way.
We can also assist in ensuring that the decisions you take are properly documented and the interests of your company secured.
