What are classes of shares?
Incorporation Services Limited provides an expert
service for all your company formation and company law requirements, including
advice about different classes of shares.
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.
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 in many
cases that is a more tax-efficient means of making payments.
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. 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 in different companies.
Redeemable non-voting shares
Widely used to award 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.
In other ways, the shares may be of limited value. Not
only will they be non-voting but the directors are usually
empowered to redeem the shares (take them back) at their
nominal value (usually £1 per share) at any time.
This is a useful power if the employee leaves, or if
the company is sold.
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, but alternatively
the preference share may be participating, in which
case it participates in profits beyond the fixed dividend
under some formula.
Preference share are often nonvoting (or nonvoting except
when their dividend is in arrears).
They may be given a priority on return of capital. Often
they will not be entitled to share in surplus capital.
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 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 arrangement, used in '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.
Variation of 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 nonvoting 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). 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 1985, s 125 (2): [Class] rights may be varied if, but only if -
(a) the holders of three-quarters in nominal value of the issued shares of that
class consent in writing to the variation; or
(b) an extraordinary resolution passed at a separate general meeting of the
holders of that class sanctions the variation.
The company's memorandum or articles may impose more stringent requirements.
CA 1985, sec127 (2): 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.
Incorporation Services Limited provides an expert
service for all your company formation and company law requirements, including
advice about different classes of shares.
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