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As a business owner, you are probably familiar with the concept of a share. Shares are a measure of ownership in a company limited by shares or limited company. However, you may be less clear on the different classes of shares and how this translates into different kinds of ownership within a limited company.
This article will explain the legal and commercial concept of a class of shares and the different forms they can take, including ordinary, redeemable and preference shares.
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.
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;
- 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.
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 and 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 return of capital. This right to first payment or return is usually either 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.
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 Preference Shares
As a matter of convention, preference shares do not usually have voting rights attached to them.
However, nothing is preventing your company from issuing preference shares with voting rights as well. Additionally, they could even attach more or less voting rights per share, for example, two votes per share.
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 the happening of some event, like a private company becoming public.
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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.
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.
Additionally, you must specify the rights attached to each class of shares on the form. As an example:
| Share | Rights Attached |
| Ordinary shares |
|
| A shares |
|
| B shares |
|
Importantly, for all shares, you should also consider amending 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, 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 today at 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 as a “preference share”.
Typically the first class of shares issued by a company when it is incorporated will have one share per vote and a right to dividend payments and a return of capital. This is, in effect, an ordinary share. If preference shares are issued, the ordinary shareholder will be paid after the preference shareholder when a company issues dividend payments.
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