Legal News | 18.10.23
Share Class rights and the potential benefits
A company with a share capital can have several different classes of share. The purpose of having different classes of share is to differentiate between the rights of each class of share.
The share class can be labelled with any name, provided that it is not misleading. The most common way of labelling different share classes is to assign alphabet shares e.g., Ordinary A Shares, Ordinary B Shares, Ordinary C Shares, and so on as necessary.
There are a wide variety of rights that can attach to different classes of shares. However, the most common rights are:
- Voting rights;
- Rights to dividends; and
- Rights to a return of capital on winding up.
One benefit of having different classes of shares is to allow the company to create non-voting shares. This is commonplace where the Company has an EMI scheme, an investor who does not require voting rights , or for a family run company.
By creating non-voting shares, it allows the founding shareholders to retain control of the company by being the only shareholders with voting shares. The new class of share created often only has the right to receive a dividend.
It can be commonplace for different shareholders to hold shares of a different class to allow the company to distribute profits of varying amounts. If there is just one class of share, all shareholders will receive the same profit distribution per share. However, by creating different classes, each class may have a different profit distribution amount allocated.
It is also possible to create a class of shares known as preference shares. A preference share typically receives a dividend payment (and/or a distribution upon the company’s winding up) in priority over other classes of share. This will enable the company to distribute profits in preference, for example to an investor. It is usual for a preference share to have a percentage profit return or be assigned a certain amount of return per share.
Return of Capital on Winding up
A different class of share can also be used as a tool to protect the existing shareholders’ position upon winding up of the company. A new class of share could be issued which allows the shareholder to receive back a set sum as a preference upon a winding up or, conversely, which does not grant the right to a return of capital on winding up or could limit the return to an amount or a percentage of the remaining assets.
Ways of creating different classes of shares
One way to create a new class of share is by allotting and issuing new shares with a different designation, and different rights to the shares already in issue. Another way of creating a different class of share is to convert existing shares into a new class by re-designating the relevant shares and varying the rights attached to them. In order to achieve either of these options, there are certain corporate documents and consents required, which will depend on the company’s constitution and any authorisations which may already be in place.