classes of shares most companies have only one class of shares

7/31/2019 Classes of Shares Most Companies Have Only One Class of Shares

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Classes of sharesMost companies have only one class of shares, ordinary shares, but it is increasingly

common for even very small private companies to have different share classes. This may be done for

various reasons, such as to be able to vary the dividends paid, to create non-voting shares, shares for

family members, etc. A company can have what shares it likes and can call any class of shares by

whatever name it chooses. Apart from ordinary shares, common types are preference shares, non-

voting shares, A shares, B shares, etc (sometimes called "alphabet shares"), shares with extra voting

rights (sometimes called "management shares"). The share class system is infinitely flexible.

Different classes of shares, and the rights attached to them, should be set out in the company's

articles of association. The new classes can then be allotted. Existing shares can be converted to

different classes (redesignation of shares). The Company Law Solutions website provides further

practical advice on these areas.

Introduction

Ordinary shares

Non-voting shares

Redeemable shares

Preference shares

Deferred ordinary shares

Management shares

Other classes of shares

Voting shares, dividend shares, capital shares

Deadlock articles

Changing class rights

Caution

Introduction

Company Law Solutions provides an expert service advising on different classes of shares and the

procedures for creating them.

(You may want to refer to 'Shares - an introduction' before reading this page.)

Any company can create different classes of shares by setting out those classes and the rights

attached to them in the company's articles. If a company has only one class of shares they will be

ordinary shares and will carry equal rights.


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Different classes of shares within a company can carry identical rights, but very often have different

voting, dividend and/or capital rights. This is done for different reasons. Sometimes it is to attract a

particular investor, e.g. by giving him or her preference shares. In other cases, shares are given to

family members or employees so that dividends may be paid to them, because it may be a more tax-

efficient means of making payments to them. In such cases, the owners of the company may want to

restrict the rights attached to such shares, e.g. by making them non-voting, and perhaps by making it

possible to take the shares back if circumstances change (perhaps by making them redeemable). In

some companies, identical classes of shares are issued to different people, and the articles provide

that the directors may vary the dividends between the different classes.

The following are descriptions of some typical classes of shares. There are no legal definitions of

such classes and shares with the same name (e.g. preference shares) will have different rights indifferent companies.

Ordinary shares

Most companies have just ordinary shares. They carry one vote per share, are entitled to participate

equally in dividends and, if the company is wound up, share in the proceeds of the company after all

the debts have been paid.

Some companies create different classes of ordinary shares, e.g. 'A' ordinary shares, 'B' ordinary

shares, etc. This is done to create some small difference between the different classes, e.g. to allow

the directors to pay different dividends to the holders of the different share classes, or to create

deadlock articles, or to distinguish between the shares so that different rules apply for share

transfers, etc. There can also be ordinary shares in the same company that are of different nominal

values, e.g. 1 ordinary shares and 10p ordinary shares. If each share has one vote (regardless of its

nominal value) the holder of the 10p shares will get 10 votes for every 1 paid for them, while the

holder of the 1 shares only gets one vote per 1.

Non-voting shares

Non-voting shares carry no rights to attend general meetings or vote. Such share are widely used to

issue to employees so that some of their remuneration can be paid as dividends, which can be more

tax-efficient for the company and the employee. The same is also sometimes done for members of

the main shareholders' families. Preference shares are often non-voting.


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Redeemable shares

These are shares issued on terms that the company will, or may, buy them back at some future date.

The date and terms may be fixed (e.g. that the shares will be redeemed five years after they are

issued, perhaps at a price different from their nominal value). This can be a way of making a clear

arrangement with an outside investor.

They may also be redeemable at any time at the company's option. This often done with non-voting

shares given to employees so that, if the employee leaves the company his shares can be taken back

at their nominal value. There are statutory restrictions on the redemption of shares. The main

requirement, like a buy-back, being that the company may only redeem the shares out of

accumulated profits or the proceeds of a fresh issue of shares (unless it makes a permissible capital.

Preference shares are often redeemable

Preference shares

These will usually have a preferential right to a fixed amount of dividend, expressed as a percentage

of the nominal (par) value of the share, e.g. a 1, 7% preference share will carry a dividend of 7p

each year. It is, however, still a dividend and payable only out of profits. The dividend may be

cumulative (i.e. if not paid one year then accumulates to the next year) or non-cumulative. The

presumption is that it is cumulative. The dividend is usually restricted to a fixed amount, butalternatively the preference share may be participating, in which case it participates in profits

beyond the fixed dividend under some formula.

Preference share are often non-voting (or non-voting except when their dividend is in arrears). They

are sometimes redeemable.

They may be given a priority on return of capital on a winding up. Often they will not be entitled to

share in surplus capital (i.e. they only get their 1 back on each 1 share).

Deferred ordinary shares

Shares on which no dividend is paid until other classes of shares have received a minimum dividend.

Thereafter they will usually be fully participating.

Management shares

A class of shares carrying extra voting rights so as to retain control of the company in particular

hands. This may be done by conferring multiple votes to each share (e.g. they carry ten votes each)or by having a smaller nominal value for such shares so that there are more shares (and so more


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votes) per 1 invested. Such shares are often used to allow the original owners of a company to

retain control after additional shares have been issued to outside investors.

Other classes

Any class of shares may be created. Sometimes different classes are set up for particular purposes,

such as the following arrangements:

Voting shares, dividend shares, capital shares

Sometimes three classes of shares are created with class 'A' having all the voting rights, class 'B'

having all the dividend rights and class 'C' having all the capital rights. It is then possible for the

different shareholders to have different percentages of the rights for these purposes. As a simple

example, Shareholder 1 may have 40% of the voting rights ('A' shares), 50% of the dividend rights ('B'

shares) and 60% of the capital rights ('C' shares). Shareholder 2 then has 60% of the votes, 50% of

the dividends and 40% of the capital.

Deadlock articles

In a company with two investors, A and B (perhaps a joint venture between two unrelated

companies) the company may have two classes of shares, A shares and B shares. The shares may

carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles may

provide for, say, two directors to be nominated by the holders of the A shares and two by the

holders of the B shares, etc.

Changing the class rights

There is some statutory protection given to the holders of a class of shares against the rights on their

shares being altered. A minority class of shares, or a class of non-voting shares, would otherwise be

vulnerable to the rights on those shares being altered by the majority (e.g. by altering the articles by

special resolution). This is known as a variation of class rights. Full consideration of this complex area

is outside the terms of this database, but the following is a summary of the main statutory

provisions:

CA 2006, sec630 provides that class rights may be varied only in accordance with the articles or if

either:


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(a) the holders of three-quarters in nominal value of the issued shares of that class consent in writing

to the variation; or

(b)a special resolution (75% majority) is passed at a separate general meeting of the holders of that

class to sanction the variation.

CA 2006, sec633: The holders of not less than 15% of the issued shares of the class (being persons

who did not consent to or vote in favour of the resolution for the variation), may apply to the court

to have the variation cancelled.

Caution

Care needs to be taken when creating different classes of shares and, indeed, in issuing shares

generally. There have been many examples over recent years where shares have been created in

order to save tax without taking proper advice as to the implications of issuing such shares to

employees, family members, etc. That is not to say that such schemes should be avoided, only that

they should be put in place only with proper advice. Company Law Solutions provides an expert

service advising on different classes of shares and the procedures for creating them. They do not

give tax advice.

classes of shares most companies have only one class of shares

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