When you choose to form a limited company in the UK, you’re given a considerable amount of choice about how you’d like to set up that company. One of which is the types and quantity of shares you want to issue. Most private companies issue ‘Ordinary’ shares, which give equal rights to all members, but some companies can benefit from issuing multiple share classes. Below, we’ll take a look at what this means.
Ordinary shares are ideal if you’re starting a company by yourself as the sole shareholder and director, if you’re setting up with just one or two other people, or if you just want to keep things simple. However, for companies with more than one shareholder, it may be beneficial to introduce multiple share classes (types).
There are many types of company shares, including Alphabet shares, Preference shares, Non-voting shares, and Redeemable shares, each of which provides different and varied rights to members. To help you understand shareholder rights, as well as the other benefits you may wish to explore by issuing multiple share classes, we’ve compiled this guide that will walk you through the basics.
What are share class rights?
First and foremost, it’s worth pointing out there are no limits to the number of rights you choose to attach to each share class you’d like to create within your company. There aren’t too many rules that will stifle you. In fact, the only real legal requirements you must comply with are:
- Your limited company should always have at least one class of shares that hold voting rights at any one time
- You are not allowed to have a company with a share capital made up solely of redeemable shares
Bearing in mind the huge amount of freedom you’ve got to play around with, a question then begs the answer: why issue different rights in the first place? After all, all shareholders are company members (owners), and so why would you want to give different owners different rights as part of their company ownership?
There are a whole lot of situations in which it would make sense to limit or differentiate the rights of various shareholders, but the three most common rights that company owners want to distinguish between share classes are:
- The right to attend general meetings and to vote on resolutions
- The right to receive dividend payments
- The right to participate in capital distribution on winding up of a company
There are certainly other key components that could make up the share class rights of your company shares. For example, you could create classes of shares that are redeemable by the company or company member. Likewise, you might want to issue preference shares that would give certain company members priority in the payment of dividends over others. Or pre-emption rights on the transfer or allotment of shares from a certain class.
As previously stated, there aren’t too many formal rules about the rights you issue through various share classes. Companies House allows you to determine for yourself how many different share classes you’d like to issue, which members will benefit from the ownership of these shares, and in what ways. You’re also effectively permitted to ‘rank’ company members and their holdings in terms of priority or importance.
To show you how that might look, we’ll explore a couple of different example scenarios.
How do multiple share classes work for a family business?
First and foremost, let’s delve into how multiple share classes could work for a family-run limited by shares company.
Let’s say ‘Mr and Mrs Hepworth’ run a successful florist business in their home town. They are concerned for the future financial security of their children, as well as their grandchildren, and so they want to use the company to help their children and grandchildren. A multiple share class company could help them to achieve this.
How? One possible share class structure the Hepworth’s could use would break Ordinary shares into three separate classes. Those classes would be:
- ‘A’ Ordinary Shares (which would include full voting rights, no rights to dividends, and full rights to capital distribution on windup)
- ‘B’ Ordinary Shares (which would include no voting rights but would enjoy varying dividends and nominal capital distribution on windup)
- ‘C’ Ordinary Shares (which would include no voting rights but would enjoy varying dividends and nominal capital distribution on windup)
In this instance, Mr and Mrs Hepworth would want to take the A Ordinary Shares. While they won’t receive any dividends on their shares, they will retain full control of the company by holding between them the only shares with voting rights attached to them, together in their position as company directors. In addition, if the company were to ever fail and windup, the couple would still be entitled to all surplus assets leftover in the company.
In this example, the couple’s children would be issued B Ordinary Shares. Meanwhile, their grandchildren would be given C Ordinary Shares. The B and C Ordinary shares would benefit from being entitled to dividends, as and when the company declares them.
What’s more, by splitting the children and grandchildren into two separate classes (and allowing for “varying rates of dividends”), Mr and Mrs Hepworth will then be able to declare different rates of dividends to the two generations, helping them as they see fit.
Had the Hepworth’s not put this structure in place – simply providing their children and grandchildren with ordinary shares instead – they would not have been able to set differing dividend rates between the two succeeding generations. Yet, more important still, the couple would have also relinquished some control over their company by allowing others to match them in terms of voting rights.
How do multiple share classes work for a company with outside investors?
Next, we’ll take a look at an example of how multiple share classes could work to help a limited company working with outside investors.
Let’s suppose ‘Annabel’ is setting up a software consultancy firm, and she has decided to raise capital by offering shares in her company to investors. She forms a company with two classes of shares:
- ‘A’ Ordinary Shares (equal rights, except each share provides five votes)
- ‘B’ Ordinary Shares (equal rights, except each share provides only one vote)
The two classes have identical rights to one another, with the exception of the weighting of the voting rights – and in return for their investment, Annabel provides outside investors with B Shares. She then keeps the A Shares for herself.
Why? By structuring her shares in this way, she will be able to put the outside investors on an equal footing with herself regarding dividend payments and capital distribution on windup. Yet while the outside investors might have insisted on retaining voting rights, Annabel has protected her overall control of the company by increasing the vote weighting her shares hold.
As a result, it becomes more difficult to lose control of the company, even as more outside investors are added.
How can I issue multiple classes of shares?
So, we know what multiple class shares are and a couple popular examples of how they could be used to help a company – but how do you actually go about issuing multiple classes of shares?
There are a couple of ways to go about this process, and they’re all fairly simple.
First, if you’re forming a limited company with articles that allow for multiple share classes, you can issue multiple share classes straight on incorporation. But even if you own an existing company, you can still issue multiple share classes.
Yet, to issue multiple classes for an existing company, you may need to adopt a new set of articles of association if no existing provisions for multiple classes are already in place in your current articles.
As part of your new set of articles of association, you should not only provide the underlying authority for your company directors to issue multiple classes, but you should also establish precisely what those share classes are going to be.
Unfortunately, the ‘model articles’ that many limited companies choose to use do not make adequate enough provisions for the issuance of multiple share classes. This means that if your limited company was incorporated using these articles, you will subsequently need to modify them if you’re keen on issuing multiple classes of shares.
To adopt the new set of articles, you’ll need your company shareholders to pass a special resolution. This means you will need at least 75% of them to approve the change. What’s more, you’ll also need to authorise the directors to issue the shares after that vote.
The same method can also then be used to vary the rights of classes that you have already issued. That being said, it is important to note that there are legal safety provisions in place that do allow for existing shareholders to apply to a court to cancel this change if they feel the undertaking of this variation unfairly prejudices them.
Once the provisions within your new Articles have been made and the directors suitably authorised, you can then allot your multiple share classes in the same way you would as your standard, ordinary shares (unless otherwise specified). When you have finished doing this, you’ll then need to let Companies House know about the changes using the form SH01, clearly specifying what share classes were allotted.
How can Quality Company Formations help you?
It is costly and time-consuming to incorporate a company with multiple share classes using Companies House services because it requires a postal application, i.e. the online incorporation application process is only available where Ordinary shares and model articles are used.
That’s why Quality Company Formations offers a bespoke package catered specifically to companies needing multiple share classes that makes life a whole lot easier for business owners.
With the Multiple Share Class Company Package you can select as many, or as few, share classes as you wish, defining what their rights are in terms of:
- The right to attend general meetings and to vote on resolutions
- The right to receive dividend payments
- The right to participate in capital distribution on winding up of a company
As soon as we receive your order, our expert team will then review your application to make sure your articles correctly make provisions for these share classes.
But if you’re still unsure, don’t worry because we are always here to help. Just give our company secretarial team a call on 020 3984 5389, and we’ll be happy to discuss.
Are you looking for a few more ideas on how to structure and manage your limited company? Check out the Quality Company Formations Blog where you’ll find loads of resources and how-to guides on company shares, filing responsibilities, appointing company officers and more.
