When the concept of issuing shares in an enterprise as a means of raising capital was first mooted, ordinary shares were the order of the day. As well as a single vote per share owned, shareholders would be allotted any dividends equally. That was back in 1602, when the Dutch East India Company first issued paper shares to fund their trading ambitions. Today, many companies still have just the one class of shares – ordinary shares. However, there are many different classes of shares, and even ordinary shares can have different features.
Modern companies can create different classes of shares to attract investors, remunerate staff and so on, provided they set out the rights attached to them in the rules for running the company, as in the articles of association. So, what are the different classes of shares and what are they used for? Below are some typical examples, but first we look at share rights.
Three kinds of share rights
Shares can also differ in the rights they give their owners. This may include voting rights, which gives shareholders the right to vote on company matters, for example, on the appointment of the board at the AGM. If they have so-called weighted rights, these will count for more say. Rights can also differ in terms of dividends paid out, including normal dividends, preferential dividends and no dividends. Capital rights mean shareholders receive any remaining assets if the company is wound up or sold.
Classes of shares and their uses
The majority of companies in the UK have ordinary shares where each share carries a vote, and a portion of the company’s earnings – or dividends per share – is paid in cash, stock or other property. Ordinary shares can also have different classes, to allow directors to pay different dividends to shareholders, or to issue shares with different nominal values.
Deferred ordinary shares
These are used to defer payment of a dividend until other classes of shares receive a minimum dividend first.
As the name suggests, such shares carry no voting rights, including the right to attend the company AGM. They are often issued as a tax-efficient means of remunerating staff, as well as giving them a real stake in the company.
These are issued on the basis that the company has the option to buy back the shares at a future date, which is either fixed or to be decided by the directors. Typically, the redemption price will be the same as the issue price, which can be attractive to would-be investors. These are often issued to staff and can be taken back for their nominal value if the employee leaves the company.
This class of shares will carry additional voting rights in order to retain control of the company. By conferring ten votes to each management share, for example, the owners of the company maintain control of the business, especially if additional shares have been issued to other investors.
This type of share has a preferential right, expressed as a percentage, on a fixed amount of dividend. For example, a £1, 5% preference share will have a dividend of 5p per year, but is payable only from profits. The dividend can be cumulative or non-cumulative and will usually be restricted to a fixed amount.
Converting shares to a different class
It’s possible to convert shares from one class to another and this can be done with the agreement of those shareholders affected by the proposed change. That said, the wiser course may be to pass a resolution, so that all shareholders have the opportunity to consent to the change in case their rights are also affected in practice.
Proceed with caution
The above list of classes is not exhaustive and it’s important to proceed with caution before creating classes of shares, and indeed for issuing shares in your company generally. Class rights is a complex area and you should only proceed with creating any new share schemes after seeking professional advice on the different classes of shares including any tax implications, and understanding how they can benefit your company and shareholders.