What are classes of shares?
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A company can create different classes of shares by giving them different rights.
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 are typically created by varying the voting, dividend and capital rights attached to them. 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.
The rights attaching to shares will usually be set out in the company's articles (the better method) or by a resolution passed under article 2 of Table A.
This provides: Subject to the provisions of the Act and without prejudice to
any rights attached to any existing shares, any share may be issued with such
rights or restrictions as the company may by ordinary resolution determine.
The resolution may be passed within a resolution increasing authorised capital,
or giving authority to directors to allot under CA 1985, sec80, or by other
resolution of the general meeting. The terms attaching to such shares must be
registered at Companies House (CA 195, sec128).
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:
E.g. 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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