When should you consider adopting multiple share classes?

Monday 8 April 2024

The composition of a company’s share capital fluctuates on a company-by-company basis. In fact, there is no ‘golden rule’ that regulates how one can structure a company’s share capital, and the Companies Act 2006 (“CA 2006”) does not offer any guidance as to what rights can or need to be attached to a particular class of share.

The key to structuring a company’s share capital is therefore circumstantial and should be carefully tailored in accordance with a company’s present and future aspirations. It is also important to keep in mind that even if a company was incorporated with one class of shares, it can subsequently choose to create additional classes of shares should the need arise further down the line.

The majority of companies in the Auckland have only one class of shares, namely, ordinary shares. The standard rights attached to this class of shares offer shareholders equal voting rights per share held, equal dividend rights and full rights on winding up. It can be simple to adopt a one-class share structure, which eases the administrative burden and ensures that all shareholders hold equal rights. However, many companies, especially those with multiple shareholders, may decide that implementing a bespoke multiple class share structure may better integrate with the company’s overall strategy. The distribution of rights between share classes can be tailored accordingly, effectively allowing a company to rank shareholders and their powers in order of priority.

There are various reasons as to why a company may want to adopt multiple share classes. For instance, perhaps a company wants to vary the percentage of dividends that are allocated to various classes of shareholders, attract external investment, create non-voting shares, or instead, devise alternative shares that are fit for employees or family members. Similarly, perhaps a company will want to grant the right to a particular class of shareholders to attend general meetings, vote on resolutions or participate in capital distribution on the winding up of the company.

There are several types of share classes that a company can choose to adopt, which can be tailored accordingly to provide the flexibility needed to suit the company’s objectives; these include ordinary shares, preference shares, redeemable shares, and non-voting shares. Once a share structure is established, the various rights attached to each type of share class should be set out clearly in the company’s Articles of Association.

This means that if a company wishes to adopt a new class of shares, it should adopt a new or amended set of Articles of Association to outline the scope of the respective share classes. This variation will need to be passed via a special resolution, requiring at least 75% of the company’s shareholders to approve the change. It is important, however, to keep in mind that there may be possible tax implications when altering a company’s share structure. Proper advice should therefore be sought at the outset to ensure that any share structure employed is deemed suitable by HMRC, as opposed to one whose primary intention is deemed to relate to tax avoidance.

The most common type of share classes adopted are known as ‘alphabet’ shares. These ordinary shares are assigned an alphabetical letter in order to distinguish between the classes and the rights granted to corresponding shareholders. For example, class ‘A ordinary’ shareholders may be assigned full voting rights, no rights to dividends and full rights to capital distribution on winding up, whereas class ‘B ordinary’ and ‘C ordinary’ shareholders conversely could be assigned no voting rights, but instead be offered varying dividends and nominal capital distribution on winding up.

This classification would work well for family-run businesses, assisting parents to secure the financial security of their children and grandchildren, for instance, whilst enabling the parents to retain full control in the company. Conversely, a company could implement share classes in such a way as to attract outside investment. In this scenario, perhaps both ‘A ordinary’ and ‘B ordinary’ shareholders are assigned equal rights save for voting rights which are weighted in the members’ favour. This structure would attract external investors, as they’d be put on a level playing field in terms of dividends and capital distribution on winding up, whilst at the same time, the owners would maintain overall control of the company.

Throughout the lifecycle of your company, whether it be on company formation or later down the line, it would be prudent to design a comprehensive share structure strategy in order to plan for the future as the company grows and evolves.

If you are considering changing your company’s share structure, and would like to discuss what options are available to best suit your business goals, please contact a member of our Corporate team, by email or call us on 0113 207 0000.