Understanding different share classes in UK limited companies

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. In addition to a single vote per share, shareholders would be allotted 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 one class of shares – ordinary shares. However, there are many classes of shares, and even ordinary shares can vary in 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 each class in the rules governing the company, such as 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 differ in the rights they give their owners.

This may include voting rights, which give shareholders the right to vote on company matters, such as appointing or removing directors and passing shareholder resolutions.

If shares have weighted voting rights, they may carry more than one vote per share.

Rights can also differ in terms of dividends, including ordinary dividends, preferential dividends and shares with no dividend entitlement.

Capital rights determine the shareholder’s entitlement to any remaining assets if the company is wound up, after creditors and other claims have been dealt with.

Classes of shares and their uses

Ordinary shares

The majority of companies in the UK have ordinary shares, where each share will typically carry voting, dividend and capital rights as set out in the company’s articles.

Ordinary shares can also be divided into different classes to allow different voting, dividend or capital rights, or to issue shares with different nominal values.

Deferred ordinary shares

These may carry rights which are deferred until holders of other classes have received specified dividends or capital entitlements first.

Non-voting shares

As the name suggests, these shares carry no voting rights, or restricted voting rights, depending on the terms attached to the class.

They are sometimes issued to employees or investors where the company wants to provide an economic interest in the business without giving the holder the same degree of control.

Issuing shares to employees can have separate tax consequences, so non-voting shares should not be regarded as automatically tax-efficient.

Redeemable shares

Redeemable shares are issued on terms which allow or require the company to redeem them at a future date or on the occurrence of specified events.

The redemption terms, including the price and timing, should be set out when the shares are issued.

There are statutory rules governing redemption. Among other things, redeemable shares must be fully paid before they are redeemed, and the redemption must be financed in accordance with the Companies Act 2006.

Management shares

This class of shares may carry additional voting rights in order to retain control of the company.

For example, by granting 10 votes per management share, the company’s founders could retain voting control even if additional shares have been issued to other investors.

Preference shares

This type of share usually gives its holder priority over ordinary shareholders when dividends are paid or capital is returned.

For example, a £1 5% preference share may carry a preferential dividend of 5p per share each year, subject to the rights attached to the shares and the company having sufficient distributable profits.

The dividend can be cumulative or non-cumulative and will often be restricted to a fixed amount.

Alphabet shares

Alphabet shares, such as A shares, B shares and C shares, are a popular way for UK private companies to create different rights between groups of shareholders.

They are usually different classes of ordinary shares, with the rights attached to each class set out in the company’s articles. Different classes may have different dividend, voting or capital rights.

This can give a company flexibility over the dividends paid to different shareholders, but the tax position needs careful consideration.

HMRC’s settlements legislation can apply to arrangements designed to divert income to another person, particularly where different share classes are used to pay dividends disproportionately to family members or other lower-tax shareholders. Whether the rules apply depends on the facts of the arrangement.

Changing shares to a different class

It is possible to change the name or rights of an existing class of shares, but the correct procedure depends on exactly what is being changed and on the company’s articles.

A variation of class rights may require the consent of the affected shareholders or a class resolution, while an amendment to the articles will normally require a special resolution.

Companies House must also be notified where required. For example, Form SH08 is used to notify a change to the name or other designation of a class of shares, while other forms apply to variations of class rights.

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, before issuing shares in your company generally.

Class rights are 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.

For most small limited companies and contractors, sticking to ordinary shares keeps things straightforward and avoids extra administration or compliance headaches.