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, explains Laura Clarke, a Partner in the Corporate and Commercial department at WBW Solicitors in Newton Abbot. ‘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 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;
- 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, 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 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;
- 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 shareholder’s 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. It will also be necessary to ensure that on the issue of new shares, the relevant stamp duty requirements have been met.
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 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 further information, please contact Laura Clarke in the Commercial team on 01626 202344 or email firstname.lastname@example.org. WBW has nine offices across the South West in Newton Abbot, Bovey Tracey, Torquay, Paignton, Exeter, Launceston, Exmouth, Sidmouth and Honiton.
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.