How Do I Create a New Class of Shares in England?

Summary

• A company can create a new class of shares to give certain shareholders different rights, such as enhanced voting or dividend priority.
• You must follow your company’s constitution, and may need shareholder approval or a resolution to authorise the new class.
• If restrictions exist, you may need to amend the constitution before creating the new share class.
• This guide explains how to create a new class of shares for UK business owners, including the legal steps and requirements.
• It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on corporate governance and share structures.

Tips for Businesses

Check your constitution before issuing a new share class and confirm approval requirements. Clearly define the rights attached to the new shares and document them properly. Consider existing shareholder rights, including pre-emption, to avoid disputes or unintended dilution.

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On this page

• Rights Attached to Shares
• An Example
• Differing Rights 
• Creating a New Class of Shares 
• Allotment 
• Converting Existing Shares
• Post-Allotment Requirements 
• Kinds of Share Classes
• Key Takeaways 
• Frequently Asked Questions

Creating a new class of shares involves issuing shares with different rights to existing shares, such as varied voting, dividend, or liquidation rights, to suit your company’s structure or investor needs. To do this, you must follow a formal process, typically including obtaining shareholder approval and setting out the new class rights in the company’s constitution or governing documents. This article explains how to create a new class of shares, the rights you can attach, and the steps your company must follow.

Rights Attached to Shares

Shares are certificates that indicate that the holder has certain rights in a limited company. There are three central rights that you can have in a company which are the right to:

• participate in shareholder meetings through voting; 
• receive dividends; and 
• receive a portion of the proceeds arising from the sale of the company’s assets following its wind-up (i.e. the value of the assets after you have met your liabilities). 

The default position is that all shareholders in the same company are equally entitled to all three rights but based on the portion of the shares they own. 

An Example

Consider the fictional company: CoCo Ltd. 

In CoCo’s case, each shareholder’s position is as follows:

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Differing Rights 

The law states that all shares of the same class must have the same rights attached to each share of that class. Similarly, the law will recognise all shares as being of the same class if the rights attached to the shares are the same, regardless of if you treat them as different classes. 

This means that if Guy and Terry wanted to become shareholders, but only on the condition that they obtain first choice on all dividends paid, CoCo would need to issue them a different class of shares. This is because the rights attached to the ordinary shares require that CoCo treat all shareholders of the same class of shares equally. 

The most likely reason CoCo would want to issue different shares to Guy and Terry is that they are prepared to invest money in CoCo.The exact nature of the rights attached to the shares depends entirely on the outcome of any such negotiations. 

An example:

• Guy and Terry give CoCo Ltd £1m in cash in exchange for 50 shares each; 
• for any dividend declared, Gury and Terry get £2 for every £1 given to the original shareholders;
• in the event CoCo is wound up, Guy and Terry are entitled to the first £1m arising from the proceeds of the sale of the company’s assets; and
• Guy and Terry have no voting rights.

In the next quarter, CoCo’s position would be as follows. 

Each shareholder’s position is as follows: 

Guy and Terry want different rights in the company compared to the original shareholders. A new class of shares must be issued to give effect to these rights. Otherwise, if you issue more ordinary shares, you would prejudice the current shareholders, as CoCo is treating the new shareholders differently. 

Creating a New Class of Shares 

There are two ways to create a new class of shares:

1. allot a new class of shares (as in our above example); or 
2. convert existing shares into a new class.

The exact nature depends on the company’s constitution. However, there are some general rules all companies will likely need to follow. 

Allotment 

Constitutional Authority 

You must first check that there are no restrictions in the company’s constitution on allotting new shares in general or new shares of a new class. 

If there is, the company must amend its constitution through a special resolution. Otherwise, any attempt to create a new class will be ineffective. 

Passing Resolution 

CoCo’s directors need to give the shareholders a resolution granting them the power to allot a new class of shares. Unless otherwise stated, an ordinary resolution will be sufficient. In practice, the ordinary resolution should specify the rights attached to the newly issued shares. 

While not always necessary, you may wish to amend the articles of association to determine the exact rights associated with each class of shares. 

Pre-Emption Rights

In some cases, the law of pre-emption might apply. This ensures that existing shareholders can subscribe for a portion of the newly allotted shares that would preserve their portion of ownership in the company. You should speak to a solicitor to ensure you comply with all relevant laws relating to pre-emption rights and that you follow your company’s constitution. 

Converting Existing Shares

Passing a Resolution 

The directors will need to present a resolution to the shareholders that dictate:

• which shares the company will convert; 
• what you will call the shares; and 
• the rights attached to this new class of shares. 

Obtaining Class Consent 

If there are already different classes of shares in existence and only one class of shares is changing, you must obtain the consent of that class in particular.

Post-Allotment Requirements 

For both an allotment and conversion, certain information, including copies of the resolutions passed and details of the rights attached to the new class of shares, must be supplied to Companies House. The deadlines vary between 15 and 30 days, depending on the circumstances.

Kinds of Share Classes

You may find it helpful to know that the law does not recognise the rights attached to shares based on their name. Therefore, you can call your shares whatever you want to call them. This is why a company may have Class A, B, and C shares. They are alphabet shares because the name says nothing about the rights attached to them. 

At the same time, you may hear references to terms like preference shares, non-voting shares, and convertible shares. These have specific rights attached to them.

Key Takeaways 

To create a new class of shares or to convert existing shares into a new class, you must follow the rules set out in your company’s constitution. For most companies, this involves the directors putting a resolution to the shareholders authorising the allotment or conversion. If the company’s articles prohibit the allotment of new classes of shares, you must amend the constitution through a special resolution. The directors then need to deliver certain documents to Companies House. 

If you need help creating a new class of shares in England, our experienced commercial 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 today at 0808 196 8584 or visit our membership page.

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