You and your business partners have got your business idea, a little funding and plenty of ideas and enthusiasm. Your accountant may have advised you to set up as a limited company, or you may have decided to do this. So now – what about your shares? They’re all the same, right? WRONG!
There are different types of shares: Ordinary, Preference, Redeemable, Deferred, Non-voting and employee. This article will assume that you choose to have Ordinary shares only in your company.
However, within Ordinary shares it is possible to have different classes of share. This is important because shares of the same class will all have the same rights. Put simply, these are:
Voting rights – the right to vote on shareholder resolutions, which are required for certain company decisions.
Dividend rights – all shares in the same class will receive dividends at the same time.
Capital rights – the right to a share of the capital of the company, eg: on a sale or a liquidation – the percentage of the whole concept.
You may have heard about alphabet shares. This is an easy way of distinguishing different classes of Ordinary shares from each other. So the Ordinary shares in each class will be called ‘A shares’, ‘B shares’, ‘C shares’, etc. n this way you can give differing rights to the differing share classes. Also, in terms of declaring dividends, it gives much more flexibility. If shares are all of one class, all shares with dividend rights are entitled to their respective percentage share of the total dividend pot.
Giving different categories of shareholder different classes of shares can provide plenty of flexibility when declaring dividends. For example, junior employees could have one class of share, senior management another. Or even each key person bringing in fees could have their own specific share class. In this way, someone who brings in a significant amount of income in a particular year could be rewarded (and incentivised) by also being given a higher percentage of the company’s profits than others. Or if someone is on an extended period of leave (for whatever reason), their dividends could be reduced accordingly. Although in the latter case, regard must still be had to any status they may have as an employee and the rights that employee status gives to them will still remain.
Setting up the share classes requires some initial advice and discussion, followed by shareholder resolutions, a board meeting and completion and filing of Companies House forms. All of these formalities must be followed to ensure that everything is correctly shown at Companies House and to avoid any subsequent share transactions or dividend declaration from being unlawful.
Ideally you should not only do this, but at the same time all shareholders would agree and sign a Shareholders’ Agreement and pass new company Articles. See our Articles on Shareholders’ Agreements and Articles for more information on these.
If you would like to discuss the share set up within your company or any other company and commercial legal issues, please do not hesitate to contact me on karen.blakesley@cognitivelaw.co.uk