Although the redesignation of shares often involves alphabet shares, it also applies to other classes of shares. We will explore some of the issues surrounding this process below.<\/p>\n
What are the typical rights associated with ordinary shares?<\/h3>\n
Ordinary shares are the most common type. Companies can create different ordinary share types – known as \u2018alphabet shares\u2019 (e.g., named A, B, and C, etc). Each type of ordinary share will have its own rights and it is up to the company to decide how many types are created.<\/p>\n Why do companies use multiple share classes?<\/span><\/a>\n \n Ordinary shares cover the basic rights associated with voting, dividends, and return of capital in the event of a winding-up. Alphabet shares are usually introduced to provide deviations to these rights, e.g., variable dividends.<\/p>\n It is also common for different types of shares to be distributed to employees within an organisation. A breakdown of different shares and their rights is as follows:<\/p>\n As the most popular type of share, ordinary shares carry one vote (per share). The owners of the company are permitted to participate equally in the company\u2019s dividends. In the event of the company winding up, any proceeds are allocated equally between shareholders.<\/p>\n Ordinary shares can be broken down into different classes, providing basic variations on their rights, and these are often denoted by a different letter of the alphabet (often known as alphabet shares).<\/p>\n Non-voting shares are commonly issued to employees to allow remuneration to be paid as dividends – usually for tax efficiency. Non-voting shares will generally mean the holders have ordinary shares with no rights to vote or attend the general meetings within the company.<\/p>\n A benefit of having non-voting shares is to provide staff with the prospect of receiving company dividends, which is often used as an incentive for the recruitment of new staff.<\/p>\n Another common reason is to allow the shareholders\u2019 children to financially benefit from the company, without relinquishing any control to them.<\/p>\n Preference shares differ because they have a fixed or variable rate of dividend which is paid out before<\/em> the other share classes – meaning they take precedence over ordinary share dividends. The remaining sums available for distribution are shared between the holders of ordinary shares after<\/em> the preference shareholders have been paid.<\/p>\n A purpose of a preference share is comparable to making a loan – an investor wanting to introduce a fixed return can do so by designating fixed rate shares. The preference share dividend will normally be valued as a percentage of what the share was valued at when issued.<\/p>\n Redeemable shares are usually issued with no voting rights. If they are issued to an employee and the employee leaves the company, the shares can be bought back by the company, and at the nominal value of which they were at the time of issue.<\/p>\n The two main reasons for having redeemable shares are (i) to be used as an exit strategy, and (ii) as a way to buy out certain shareholders.<\/p>\n Redeemable shares can be redeemed at the instigation of either the shareholders or the company directors or both (depending on what the articles say).<\/p>\n What is a shareholders\u2019 agreement and why do I need one?<\/span><\/a>\n \n In summary, the reasons for having multiple classes of shares include:<\/p>\n There may be a time when you recognise your company is somehow being hindered by your share structure. The reasons for carrying out a redesignation of shares might be:<\/p>\n By deciding to carry out a redesignation of shares, it may be possible to:<\/p>\n One of the key reasons for a redesignation of shares relates to tax planning. The freedom of declaring different rates of dividends to different shareholders can be financially beneficial. For example, if one shareholder is an employee who pays income tax whereas another shareholder does not work, applying different dividends to each of them can optimise personal tax allowances, etc.<\/p>\n Although there are many valid motives for the redesignation of shares, it is advisable to ensure that you are creating a new structure that makes sense.<\/p>\n If creating various share types with different entitlements has the result of over-complicating matters, you risk progress being stalled in other areas: managing general meetings can become harder and raising new capital from investors could become more tricky.<\/p>\n Before a company can allot additional classes of shares, it needs to have the required authorities in place.<\/p>\n In the first instance, the company\u2019s articles of association should specify the classes of shares that the directors can allot, the rights these shares have, and how the share rights can be changed in the future.<\/p>\n If the company\u2019s articles do not specify this, then it will have to adopt a new set of articles that do. The process for doing this is to pass a special resolution<\/a> (which requires 75% of the company\u2019s shareholders to agree) to adopt the new set of articles.<\/p>\n Ordinary Shares<\/h4>\n
Non-Voting Shares<\/h4>\n
Preference Shares<\/h4>\n
Redeemable Shares<\/h4>\n
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Why you would redesignate your shares?<\/h3>\n
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Conditions needed to allow for multiple classes of shares<\/h3>\n
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