Summary
- A Shares and B Shares are generic terms for different classes of ordinary shares within the same company, with rights varying in areas such as voting power, dividend entitlements, and priority on return of capital upon winding up.
- Companies commonly use multiple share classes to accommodate founders with different roles, attract investors with specific return expectations, or reward employees with equity whilst retaining voting control among existing shareholders.
- The exact rights attached to each share class must be specified in the company’s articles of association, which requires a special resolution, filing with Companies House, and careful consideration of potential tax implications before implementation.
- This article is a guide to A Shares and B Shares for company directors and shareholders in England and Wales, explaining how different share classes work and how their rights are determined.
- LegalVision is a commercial law firm that specialises in advising clients on corporate law and share structures.
Tips for Businesses
Clearly define the rights attached to each share class in your articles of association rather than relying solely on a shareholders’ agreement, as unenforced rights may not be legally recognised. Seek tax advice before creating new share classes. File all amended articles and resolutions with Companies House promptly following shareholder approval.
Many companies issue more than one class of shares, commonly referred to as “A Shares” and “B Shares”, to reflect the different rights and objectives of their shareholders. However, these labels alone tell you very little about what rights those shares actually carry. This article will consider these commercial and legal points before explaining how to determine the exact rights attached to shares described as “A Shares” and “B Shares”.
Class of Shares: An Overview
A class of shares will differ from another class of shares if the rights attached to the shares vary. The rights in question relate to the right of the shareholder to:
- vote in shareholder meetings;
- receive dividends; and
- receive a return of capital when the company is wound up.
Therefore, if one class of shares grants one shareholder the right to vote in meetings, whereas another class does not grant the shareholder any voting rights, the law considers these to be shares of a different class.
How the rights differ is a matter for the company and its shareholders to determine. There are countless ways a company can vary rights across different classes of shares. Despite that, a company may refer to shares using common names. Examples include:
- Ordinary Shares: Grant shareholders the right to vote, receive dividends, and a return of capital upon a wind-up.
- Preference Shares: Typically entitle one class of shareholders to first dibs on liquidation proceeds ahead of another class, and sometimes also to preferential dividends.
A Shares and B Shares: Common Usage
A company choosing to refer to the shares as A Shares and B Shares is a matter of convention. The company would also be perfectly free to name one class “X Shares” and another “Y Shares”.
There are many reasons a company may wish to have more than one class of shares. In practice, companies may have shareholders with different objectives. For example, its founders may want to own the shares throughout their lives and ensure they maintain voting control. Later-stage investors may want to sell the shares they received for more than what they paid. Alternatively, a company may want to reward its employees with shares.
In each case, the rights attached to one class of shares may not be appropriate for another class of shareholders.
With this in mind, A Shares and B Shares typically refer to shares that might generally be described as ordinary shares, but which, when compared to one another, have different rights. For instance, consider how the following rights differ between two hypothetical classes of shares:
| Voting Rights | Class A shares hold twice the voting power relative to Class B shares on all shareholder resolutions. |
| Dividend Rights | The directors can decide to pay different amounts of dividends on Class A and Class B shares. Any dividends declared on a share class are paid to the holders of those shares based on the number of shares they hold. |
| Right to Capital Upon a Wind-Up | Class A shares rank after Class B shares in terms of the shareholder’s right to a return of capital upon a wind-up. |
Examples of Company Usage of Two Share Classes
The most common situations where we see two different classes of ordinary shares are:
- There are two equal 50:50 founders who want equal voting rights and equal rights to a return of capital. However, they are devoting different amounts of time to the company and want to receive some of their salary through a dividend. One founder will hold 50 A shares, and the other will hold 50 B shares. The A and B shares have the same voting and capital rights; however, the directors are free to declare different dividend amounts for each share class at their discretion, or the dividends are fixed. For example, A shareholders receive 60% of any dividends, and B shareholders receive 40%.
- The directors want to reward the key employees with equity in the company, and are happy for them to share in dividends and the proceeds of a sale, but do not want the employees to have a say in company decisions. The employee shareholders are issued a different type of ordinary shares, for example, B shares, which do not have voting rights.
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Legal Considerations When Creating Share Classes
To create different classes of shares, a company must follow specific procedures outlined in the Companies Act. This typically involves:
- amending the articles of association to include the new share class and its associated rights. Typically, a company’s articles of association would specify the exact nature of the rights attached to different classes of shares. The obvious downside is that because your articles are publicly available, anyone can inspect them;
- passing a special resolution of the shareholders to approve the amendment to the articles;
- if rights attaching to an existing share class are being amended, passing a resolution of the shareholders holding at least 75% of the shares in that class; and
- filing the amended articles and resolution with Companies House.
It is crucial to note that creating new share classes may have tax implications, particularly for private companies. Therefore, it is advisable to seek professional advice before proceeding.
This template helps you document important and major decisions or actions reached in board meetings.
Articles of Association
Typically, a company’s articles of association would specify the exact nature of the rights attached to different classes of shares. The obvious downside is that because your articles are publicly available, anyone can inspect them.
That said, it is not a strict legal requirement that your company articles specify shares of a different class. However, the risk is that if they do not do so, shareholders may be unable to enforce their rights against the company.
For instance, suppose your company does not specify the rights attached to different classes of shares in its articles of association. Instead, these rights are contained in a private shareholders’ agreement. If the company later refuses to recognise the terms of the agreement as relates to the class of shares’ rights, then the law may not treat the shares as of different classes.
Key Takeaways
A Shares and B Shares generically describe two different classes of shares with similar rights attached to them, but which differ in certain respects. For instance, one class of shares may entitle the shareholder to voting rights, and another may not. In all other respects, including rights to dividends and a return of capital upon winding up, the rights are the same.
However, it is important to note that ‘A shares’ and ‘B shares’ are generic terms. In most cases, the exact nature of the rights will be specified in the company’s articles of association, and you would need to refer to the relevant provisions in the Articles to work out what the different rights are.
If you need help issuing shares of different classes, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses across industries 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
Yes, a company can convert one class of shares into another, provided it follows the proper procedures and complies with applicable laws. This typically involves amending the articles of association and obtaining shareholder approval. The process is known as ‘re-designation’ or ‘conversion’ of shares. Companies House must be notified after the conversion has taken place, both regarding the change in name and the change in rights.
A statement of capital is a snapshot of a company’s issued share capital at a specific point in time. It must be filed with Companies House on various occasions, such as after an allotment of shares or as part of the annual confirmation statement. It includes details like the total number of shares, their nominal value, and the rights attached to each class of shares.
Since a company limited by guarantee does not have share capital, it does not have any shares. Therefore, its owners are not referred to as shareholders. Instead, the law refers to them as members.
No, the labels “A Shares” and “B Shares” are purely conventional. The actual rights depend entirely on what the company specifies in its articles of association, which you must review to determine the exact entitlements.
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