Summary
- Ordinary, redeemable and preference shares are different classes of shares that give varying rights in a UK company, such as voting, dividends and repayment priority.
- Ordinary shares typically carry voting rights and variable dividends, while preference shares often have fixed dividends and priority in payments.
- Redeemable shares can be bought back by the company under agreed conditions, making them a more flexible, temporary form of ownership.
- This guide explains ordinary, redeemable and preference shares for business owners in the UK, outlining key differences and rights, prepared by LegalVision, a commercial law firm that specialises in advising clients on corporate structuring.
- It provides a practical explanation of how share classes affect control, returns and investment strategy.
Tips for Businesses
Choose share classes based on your goals. Use ordinary shares for control, preference shares to attract investors, and redeemable shares for flexible funding. Clearly define rights in your articles of association to avoid disputes and ensure your structure supports growth and investment needs.
Ordinary shares, redeemable shares and preference shares are different classes of equity that carry distinct rights over control, dividends and exit. For your business, choosing the wrong share type can dilute control, increase investor obligations or create costly disputes, particularly when raising capital or structuring ownership. Ordinary shares typically carry voting rights and residual profits, preference shares offer priority dividends, and redeemable shares can be bought back on agreed terms. This article explains the differences between ordinary, redeemable and preference shares and how each affects your company’s structure and risk profile.
Share Capital
A company’s share capital refers to all the shares across all the different classes issued to shareholders. This will usually be contained in a current statement of share capital. This document is one that your company will have to update from time to time with Companies House.
It is important to note that share capital is different from a company’s market value. While share capital represents the total nominal value of issued shares, market value is determined by factors such as the company’s performance, assets, and market conditions. For example, a company might have a share capital of £100,000 (100,000 shares at £1 nominal value each) but a market value of millions if it is highly successful.
A company’s statement of capital is a snapshot of the company at a certain point in time. It will include the following information:
- the total number of shares issued by the company;
- what the nominal value of all the shares are;
- how much (if any) of the total shares are unpaid; and
- information about the rights attached to each class of shares.
You will need to update the statement of capital in certain circumstances, including:
- upon incorporating the company;
- when altering the share capital (e.g. by issuing new shares or splitting the shares into a more significant number);
- when cancelling or reducing the shares; and
- as part of the annual confirmation statement.
Classes of Shares
A class of shares refers to a group of shares. Those shares give owners or shareholders the same rights as anyone else holding the same group of shares. Put another way, all shares of the same class must give the same rights to the shareholders of that class of shares.
If the rights attached to one group of shares differ in any way from any other group, these shares are of a different class. When creating different classes of shares, it is crucial to clearly define the rights and restrictions associated with each class in the company’s articles of association. This helps prevent future disputes and ensures all shareholders understand their entitlements. For instance, you might specify that Class A shares have voting rights while Class B shares do not, but Class B shares have priority for dividend payments.
The most common classes of shares include:
- ordinary shares;
- preference shares;
- non-voting shares;
- redeemable shares;
- redeemable preference shares; and
- “A Shares”, “B Shares”, “C Shares”, etc.
Ordinary Shares
If your company’s shares give all the shareholders the same rights, these shares are “ordinary shares.” It is common for companies to issue ordinary shares at their time of incorporation.
Likewise, ordinary shares typically give the shareholder the right to:
- vote at general meetings (usually one vote per share);
- receive dividend payments. A director will issue dividend payments at their discretion if the company has made a sufficient profit; and
- receive a return of capital in the event the company is wound-up. This is provided that the company pays back all creditors and any shareholder with preference shares first.
Ordinary shares rank at the absolute bottom of the order of priority. This is the order in which all the stakeholders of a company are paid if the company cannot pay its debts (or it has entered into solvent liquidation). In practice, when a company is insolvent and placed into administration or liquidation, ordinary shareholders are rarely entitled to any of their investment (outside of any ex-gratia payment).
Preference Shares
Preference shares refer to any share that ranks above ordinary shares in terms of dividend payments and/or return of capital. This right to the first payment or return through dividends is usually cumulative or fixed, though it can be both.
Cumulative Preference Shares
Cumulative refers to the right of a preference shareholder to receive payments each dividend period, including any dividend payments missed because the directors did not declare a profit.
At any rate, in the fifth quarter, they declare a substantial profit, and you are the only holder of the preference shares with cumulative rights to dividend payments. In this case, you have entitlements to receive payments for all five quarters. This entitlement comes before any ordinary shareholders receive their dividends.
Fixed Preference Shares
A preference share with fixed rights will usually be expressed as a percentage relative to the value of the share. For instance, it might be 7% of £1 per share. Therefore, if you hold 100,000 shares, provided there is sufficient profit, you will be paid £7,000 in dividends if the directors issue a dividend payment.
Fixed preference shares behave much like a loan in that investors will receive a fixed income payment (but only out of profits). This can have various impacts on your company’s assets and liabilities, which is beyond the scope of this article.
Participating or Non-Participating Preference Shares
Often, preference shares have a right to a return of capital ahead of the ordinary shareholders, which may or may not include any amounts previously paid as dividends.
Typically, this is a non-participating right, which means that once the preference shareholders have received their fixed return, they do not share any further in the rest of the proceeds. Often, their fixed return is a 1x liquidation preference, which means that if the shareholder paid £10 per share, then they would receive £10 per share back before the proceeds were shared with any other shareholder holding a different class of shares.
Convertible Preference Shares
These generally refer to where preference shares will “convert” to ordinary shares (or cash):
- at a predetermined price;
- after a predetermined date; or
- after some event, like a private company becoming public, the event of an exit event or where there is a ‘down round’ as an anti-dilution protection mechanism.
The purpose of this conversion rights with non-participating preference shares is that it enables the shareholder to receive the greater of (1) their liquidation preference (e.g. £10 per share using the example set out above) and (2) the amount they would receive if they converted their preference shares to ordinary shares and shared in the proceeds based on their shareholding percentage. If the company’s share value has increased since the shareholder invested, then you would expect their share of proceeds to be higher than just receiving back what they initially paid.
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Other Classes of Shares: Conditional Rights and Redeemable Shares
You can feasibly attach other rights to new classes of shares your company issues. One example may be that if ordinary shareholders receive a dividend payment above a certain threshold, “C Shares” shareholders are entitled to double dividend payments.
Another common type of share is a redeemable share, similar to a convertible share. However, private companies must first pass a special resolution that amends the articles setting out the terms and conditions of the convertible shares.
The effect is that the shareholder of a redeemable preference share has the right (but not the obligation) to convert their shares to cash or another kind. Indeed, this right is inherent to the share, not merely the right to a dividend payment whenever the directors declare. Ultimately, this is why your company must amend its articles to issue redeemable shares lawfully, and there must be at least one non-redeemable share in issue for a company to issue any redeemable shares.
Learn how to meet your directors’ duties and ensure compliance with LegalVision’s free UK Board Reporting Toolkit.
Formalities for Recording Classes of Shares
Your statement of capital that you file with Companies House must include:
- the different shares you issue; and
- the various rights attached to each class of share.
Anytime the number of issued shares changes, you must update your statement of capital.
Additionally, you must specify the rights attached to each class of shares on the form. As an example:
| Share | Rights Attached |
| Ordinary Shares | voting rights (one right per share); right to return of capital upon wind-up; and right to dividends. |
| A Shares | voting rights (two votes per share); rights to dividends; and return of capital upon wind-up subject to first rights held by B shares. |
| B Shares | no voting rights; first rights to dividends; and preferential return of capital. |
Importantly, for all shares, you should also amend your articles of association. That way, you can ensure you incorporate the rights attached to the shares in the articles.
Key Takeaways
The law does not define the classes of shares commonly used by companies and their investors. Instead, as a matter of law, all shares of the same class must give the same rights to the shareholders. If they do not, they are not of the same class. Aside from this, a company is free to issue shares with any combination of rights attached to it as they wish. By convention, the rights tend to be either voting rights or rights to dividend payments and the return of capital if the company is wound up.
If you need help issuing new classes of shares, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
There is no strict legal definition of preference shares. However, investors usually refer to any share that ranks above an ordinary share regarding the right to a dividend payment or having a liquidation preference as a “preference share”.
Typically, the first class of shares issued by a company when incorporated will have one vote per share, a right to dividend payments and a return of capital. This is, in effect, an ordinary share. If preference shares are issued, the ordinary shareholders will be paid after the preference shareholders when a company issues dividend payments.
Yes, a company can issue different classes of ordinary shares, often referred to as “A” shares, “B” shares, and so on. These classes can have varying rights attached to them, such as different voting powers or dividend entitlements. For example, “A” ordinary shares might carry one vote per share, while “B” ordinary shares might carry two votes per share. It is crucial to clearly define these differences in the company’s articles of association.
If the company issues A shares and B shares but they have identical rights, then in fact they only have one class of ordinary share, despite the different names.
You should clearly define share rights to avoid disputes and ensure transparency. Setting out rights in your articles helps align shareholder expectations and supports effective company governance.
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