Table of Contents
In Short
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Ordinary shares typically offer voting rights and dividends, while preference shares may provide priority dividends and liquidation claims.
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Create classes like A or B shares to tailor voting, dividend, and liquidation rights to specific shareholder needs.
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Clearly outline share rights in your company’s articles of association to prevent disputes.
Tips for Businesses
When considering multiple share classes, ensure your company’s articles of association clearly define the rights attached to each class. This clarity helps prevent future disputes and aligns shareholder expectations. Consulting with a solicitor can help structure share classes that meet your business goals and comply with legal requirements.
Share class structures play a pivotal role in shaping a company’s ownership, control, and capital raising capabilities. Share classes are different types of shares that a company can issue, each carrying its own set of rights, privileges, and restrictions. Understanding these structures is crucial for founders and investors as they significantly influence a company’s decision-making processes, financial flexibility, investor appeal and long-term trajectory. This article outlines the different share classes and how they affect your rights.
Ordinary Shares vs. Preferred Shares
A common and key distinction in share classes is between ordinary shares and preferred shares:
- Ordinary Shares: These are the standard form of equity ownership in a company. Holders typically have voting rights (one vote per share) at shareholder meetings and are entitled to receive dividends if declared by the board of directors. However, they are generally last in line for company assets in the event of liquidation.
- Preferred Shares: These shares often come with preferential treatment in certain aspects. While they may or may not carry voting rights, holders usually have priority over ordinary shareholders in receiving dividends and in claims on assets if the company is liquidated.
Voting Rights
Voting rights are a crucial aspect of share ownership, allowing shareholders to have a say in major company decisions. Some share classes may carry one vote per share, while others may have multiple votes per share or no voting rights at all.
The allocation of voting rights across different share classes can significantly impact corporate control and governance.
Continue reading this article below the formDividend Rights
Dividend rights determine how a portion of the company’s profits are distributed among shareholders. Different share classes may have varying dividend rights, with some classes receiving dividends before others. Some shares may also have fixed dividend rates, while others may be entitled to variable dividends based on company performance.
Liquidation Preferences
In the event of a company’s liquidation or sale, different share classes may have different rights to the proceeds.
Some share classes may have multiple liquidation preferences, entitling them to receive a larger portion of the proceeds.
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Other Types of Share Classes
Share classes can be structured in various ways to meet different corporate needs and investor preferences. Aside from ordinary and preferred shares, some of the most common types are outlined below.
Class A and Class B Shares
This is a popular dual-class structure, often used by family-owned businesses. Typically, both Class A and B shares carry one vote per share, but may have different dividend rights.
Non-Voting Shares
As the name suggests, these shares do not carry voting rights and are often issued to raise capital without diluting control. As such, they are commonly issued in family-owned businesses and other companies with a small leadership. To compensate for the absence of voting rights, they may offer higher dividend yields.
Redeemable Shares
These are shares that the company has the right or obligation to buy back at a future date. Generally, they are a useful tool for companies to maintain flexibility in their capital structure. The terms of redemption (price, date, conditions) should be set at the date the shares are issued.
Deferred Shares
These shares typically have limited rights and are often used in corporate restructuring. For example, they may have no voting rights and no rights to dividends until certain conditions are met. Deferred shared may sometimes be used to compensate founders or early employees, with rights that vest over time.
Each of these share classes can be further customised to suit specific needs. For instance, companies might create hybrid classes that combine features of different types, or they might use lettered classes (Class C, Class D, etc.) with varying rights and restrictions.
Advantages and Disadvantages of Multiple Share Classes
The use of multiple share classes can offer significant benefits, but it also comes with potential drawbacks. Understanding these concepts is crucial for companies considering the implementation of such structures.
| Advantages | Disadvantages |
| Flexibility: Multiple share classes allow companies to tailor equity offerings to different investor needs and preferences. Targeted Investor Attraction: Companies can attract diverse investors by offering shares with specific rights or features. Control Retention: Founders or key shareholders can maintain control even while raising significant capital, often through high-voting shares. Customised Incentives: Different share classes can be used to create tailored incentive structures for employees, executives, or strategic partners. | Complexity: Multiple share classes can make a company’s capital structure more complex, potentially deterring some investors. Potential Conflicts of Interest: Divergent rights among share classes may lead to conflicts between different shareholder groups. Market Perception: Some investors view complex share structures negatively, especially those that concentrate control. Reduced Liquidity: Certain share classes may have limited marketability, potentially affecting their value and the company’s overall valuation. |
Key Takeaways
Share class structures are a powerful tool in corporate finance and governance, offering companies the flexibility to align their capital structure with their strategic goals. From maintaining founder control in high-growth startups to attracting diverse investors in established corporations, the correct use of different share classes can provide significant advantages.
However, the implementation of multiple share classes is not without challenges. The potential for unnecessary complexity, conflicts of interest, and negative market perception means their use requires careful consideration and planning. There is no one-size-fits-all approach to share class structures. Each company must evaluate its long-term objectives and stakeholder interests when designing its share structure.
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Frequently Asked Questions
Yes. Companies may vary rights attached to share classes by following legal procedures, usually requiring shareholder approval through special resolutions. Such changes must comply with the company’s articles of association and the Companies Act 2006 to ensure legality and fairness to shareholders.
Minority shareholders have statutory protections under the Companies Act 2006, including rights to challenge unfair prejudice and require certain shareholder approvals for major changes. Courts can intervene if decisions disproportionately harm minority interests, ensuring fair treatment despite unequal share class rights.
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