Multiple share class companies
Flexibility through variation in rights and other privileges
Generally, UK private limited companies opt to have only one share class: Ordinary Shares. Yet, different share classes shouldn't be viewed as something exclusively for large companies. It is possible, and in fact increasingly common, for even very small private companies to have more than one share class. Different share classes are often desirable for the individual shareholder as they enable a single shareholder to own more than one class of shares in the same company, and so benefit from the rights applicable to each type.
So, person X can hold 150 ‘A' shares, and benefit from the rights attached to that share class, whilst at the same time holding 150 ‘B' shares, and benefit from their applicable rights as well.
Why have more than one class of share?
A company with several classes of shares requires some level of variation in rights or other privileges. Otherwise there would be little point in having more than one type of share.
You may choose to have multiple classes to:
- Provide different dividend rights for different shareholders.
- Provide voting rights to one class only, or restricted voting rights to one class, or weighted voting rights to one class.
- Keep certain rights within one group of people; for example, employees or one family.
Note that these are only a few examples, other circumstances may occur in which it may be favourable to have multiple share classes.
As shown above, there can be a variety of reasons for having multiple types of shares. With differing share types come differing rights and restrictions.
The voting rights attached to shares are chosen at the company's discretion, and the voting rights of a shareholder depend on what class of shares they hold. These could include a class of shares with a) full voting rights in all circumstances, b) no voting rights in any circumstances, or c) voting rights only in certain, specified circumstances. It is common practice for companies with only two share classes to have one class (‘B' shares) which have no right to vote.
The general rule regarding dividends is that the company will declare dividends in accordance with the respective rights of the members. These rights could include a) no distinction between dividend received by the different classes of shares, b) the power to pay different rates or amounts of dividends on each share class ("variable dividends") by shareholder resolution and power for the directors to pay variable interim dividends without approval of the shareholders, or c) the power to pay variable dividends by shareholder resolution only.
Some companies grant more complex dividend rights. "Preference" or "preferred" shares may have a right to a fixed annual dividend (assuming there are sufficient distributable profits to pay it) or a preferential right to a certain proportion or part of the company's profits. In this case, dividends will only be payable on the ordinary shares if or to the extent that the company's distributable profits exceed the level required to pay the preferential dividends.
Allotment rights will depend upon the particular circumstances of the company, the wishes of the directors, and the wishes of prospective shareholders. Commonly these take one of the following forms: a) Directors' discretion, whereby directors can allot shares, irrespective of class, to whoever they wish, b) Class pre-emption rights in respect to all classes, whereby directors must first offer shares to the holders of the class being allotted, proportional to their existing holdings in the class, c) Class pre-emption rights in respect to one class, whereby (b) is applicable only to one class and the director's discretion is exercised towards the rest, d) Pre-emption rights irrespective of class, whereby directors must offer shares to all shareholders, on a proportional basis, irrespective of the class of shares they hold.
As with allotment rights, the suitable transfer rights will depend upon the particular circumstances. The key difference between allotment rights and transfer rights is that the latter are concerned with the transfer of previously allotted shares. Common provisions include the following:
- Directors' discretion, whereby directors may refuse to register any transfer of shares, irrespective of its class
- Class pre-emption rights in respect to all classes, whereby the transferor must offer shares to the holders of the class being transferred, proportional to their existing holding in the class,
- Class pre-emption rights in respect to one class, whereby the other shareholders' rights of first refusal are applicable only to one class and the directors' discretion is exercised towards the rest
- Pre-emption rights irrespective of class, whereby a transferor must offer the shares he wants to dispose of to all shareholders, on a proportional basis, irrespective of the class of shares they hold.
- Family transfers: in a family company, it may be appropriate to allow transfers of shares to members of a shareholder's family without triggering the pre-emption rights.
- Employee shareholders: it may be appropriate to include a requirement that a shareholder must offer his shares for sale when he leaves the company. Sometimes, the price that is payable for the shares of an exiting shareholder will depend on whether he is a "good leaver" or a "bad leaver".
- "Drag along" and/or "tag along": Drag along articles allow majority shareholders to force minority shareholders to sell their shares when the majority want to sell the entire company to a third party. Tag along articles give minority shareholders a right to join in on a sale of shares by the majority shareholders to a third party.
At the end of a company's life, and after all liabilities have been discharged, any remaining assets of the company will be distributed to the members in accordance with the rights attached to their shares. These usually take one of the following forms:
- All classes of shares will rank equally as regards repayment of the moneys paid on their shares and the distribution of any final surplus; or
- The share classes will be repaid in a certain order, for example ‘A' first, then ‘B', then ‘C' etc and any final surplus will be paid to the holders of one class to the exclusion of the other(s)
- A combination of the above (for example, all shares rank equally for repayment of the moneys paid up and the final surplus will be paid to the holder/s of one of the classes of shares only; or there is an order of priority between the classes for repayment but any final surplus is to be divided equally amongst all the shareholders).
Share classes are often part of a wider structure, aspects of which may be governed by other documents such as shareholders' agreements, investment agreements, share options and so on. It is essential that appropriate legal and taxation advice is taken by the company and its shareholders when setting up and documenting any share class structure to ensure that it will achieve the desired aims and not have any adverse or unintended consequences. If you are looking to set up a new company with more than one share class or change the structure of an existing company, contact us for further information.