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Many companies have different classes of shares, which they refer to as “A Shares” and “B Shares”. The law does not provide a strict definition of these classes of shares. Instead, the rights attached to the shares will depend on the company in question. However, there are some practical and commercial similarities between companies. 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 set of shares will differ from another set 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 set of shares gives one shareholder the right to vote in meetings, whereas another set does not give the shareholder any voting rights, the law says these are 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, which grant shareholders the right to vote, receive dividends, and a return of capital upon a wind-up;
- preference shares, which typically entitle one class of shareholders to first dibs on dividends ahead of another class;
- voting shares, which give shareholders the right to vote; and
- right to appoint directors.
A Shares and B Shares: Common Usage
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 life. 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 | Class A and Class B shares rank equally to one another in terms of entitlement to dividends. |
| Right to Capital Upon a Wind-Up | Class A shares rank after Class B shares in terms of the shareholder right to a return of capital upon a wind-up. |
Since “voting right shares” and “preference shares” each connote different things, a company may choose to refer to the shares as A Shares and B Shares. However, this is a matter of convention. The company would also be perfectly free to name one class “X Shares” and another “Y Shares”.
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Legal Considerations
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 by not doing so, the shareholders cannot 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. 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 share’s rights — for instance, the directors may disagree with some of the shareholders — then the law may not treat the shares as of different classes.
This template helps you document important and major decisions or actions reached in board meetings.
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 weighted voting rights in certain situations. In contrast, the other class of shares may have unweighted voting rights. 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 these are generic terms. In most cases, the exact nature of the rights will be specified in the company’s articles of association.
If you need help issuing shares of different classes, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The doctrine of maintenance of share capital restricts the ability of a shareholder to demand a return on the value of the money they transferred to your company in exchange for shares.
Since a company limited by guarantee does not have share capital, it has no shares. Therefore, its owners are not called shareholders. Instead, the law refers to them as members.
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