12th February 2020
A company may choose to restructure its shares and issue different classes of share for a variety of reasons, such as raising capital, reducing debt, attracting investment, incentivising key company executives and launching a new subsidiary or spin-off company.
It is important to ensure that share capital is dealt with correctly and that associated class rights are properly recorded and documented, as this will help to avoid potential disputes in relation to important issues such as voting rights and dividend payments.
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.
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:
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 can be used to allow the company to;
Deferred shares 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;
Often 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 shareholder’s agreement. More bespoke rights can therefore be crafted to suit the specific 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. It will also be necessary to ensure that on the issue of new shares, the relevant stamp duty requirements have been met.
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.
Any new classes of share, created for the benefit of your company, should be tailored to carefully 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.
For advice on any of the above, please contact us on 01782 525000 or email firstname.lastname@example.org.
This article is for general information purposes only and does not constitute legal or professional advice. Please note that the law may have changed since the date this article was published.