Setting up a limited company with multiple share classes takes more planning than a standard company with one class of ordinary shares. In our experience as company formation specialists, it is far simpler to get the share structure right before incorporation than to fix it afterwards. This article explains the rights each class can carry, what alphabet shares are and why model articles may not provide for separate share class rights.
- Share classes can differ on just one right — voting, dividends, capital or redemption — rather than all four.
- Alphabet shares (A, B, C) are simply ordinary shares tagged by letter, with the real substance lying in the rights written into the articles.
- Model articles permit extra classes but lack proper procedures for class meetings or altering rights later.
- Changing class rights afterwards needs consent from holders of 75% by nominal value, and 15% of dissenters can petition the court.
- The statement of capital filed at incorporation becomes the public proof of each class's rights.
Shares can be issued in different classes, which in turn give shareholders different rights. Examples include voting and non-voting ordinary shares, preference shares and deferred shares. According to Article 2 of the Companies (Shares and Share Capital) Order 2009, share classes can be used to determine whether you get a:
- Vote
- Dividend
- Share of the money if the company is wound up, and/or
- Redeemable share, which the company can buy back on agreed terms.
Different share types just mix these up differently. Importantly, share classes do not need to differ on all four types of rights. Many alphabet share classes vary only the dividend rights, or only the vote, but have the same capital rights.
Multiple share classes in a limited company help manage risk and control.
- A shareholder might want a safer, more predictable return (e.g. an investor) in return for less say in the business.
- Another shareholder may want shares that pay out when the company is wound up, rather than ongoing dividends.
- Employee share scheme share classes can reward staff with a stake in future growth.
- Founders themselves often keep a class with strong voting rights so they retain control over strategic decisions. That control survives even after they bring in outside capital or reward key employees with shares.
In each case the share class does the job that a shareholders’ agreement would otherwise have to do.
When you set up a limited company, you submit an application to Companies House (form IN01). This includes a statement of capital, where you must provide the prescribed particulars for every class of share the company issues from the outset. The statement of capital becomes the public, official record of what each class of share actually gives its holder. A company may later need to prove what rights a particular class carries, whether for a dispute, a sale or a tax question. This document is one of the first places anyone will look.
Most companies use ‘model articles’ as their founding rulebook. The model articles include a basic power to create a new share class after incorporation by getting shareholders to vote for it. As such, model articles do not prohibit multiple share classes. The problem is what happens after you create that new class. Model articles of association tend not to include proper processes for holding a meeting just for that group of shareholders, changing rights or handling a sale.
Without that, if you ever need to change the rules for a class down the line, you are reliant on the law and, hence, a much more laborious process. This often requires agreement from the holders of at least three-quarters (by nominal value) of the shares in that class. Holders of 15% of the class who disagree can then ask the court to cancel the change. This is why it is always better to get the share classes right before incorporation. It is also worth including your own rules in the articles to handle this in future.
Many company formation agents, including us at Uniwide Formations, do not usually use the model articles. Instead, they have developed their own standard articles of association. These keep the strong points of the model articles but suit a wider range of private companies limited by shares. These articles allow a company to be formed with multiple share classes from day one.
There are several common share types used by limited companies in the UK, including:
| Share class | Key features |
|---|---|
|
Ordinary shares |
– Equal voting, dividend and capital rights for every holder |
|
Non-voting shares |
– No voting rights |
|
Preference shares |
– Fixed or prioritised dividend |
|
Redeemable shares |
– Company can buy the shares back on agreed terms later |
Alphabet shares in a limited company are just ordinary shares split into different groups, usually labelled A, B, C and so on. A shares and B shares in a limited company allow the company to give different shareholders different rights instead of treating everyone the same. Normally, one ordinary share means one vote, one equal slice of dividends and one equal slice of capital if the company winds up. Alphabet shares allow you to give one group full voting rights but no dividends. Another group might get full dividends but no vote, and so on – whatever mix suits the people involved.
To get a better understanding of Alphabet shares, it is useful to look at some different scenarios and how A, B and C shares may be used:
- Family business – A husband and wife run a business together. He takes A shares with full voting rights, full dividends and full capital rights, so he keeps control. She takes B shares with no vote but full dividends, so she can receive income from the business without having any say in decisions. The letters “A” and “B” do not inherently mean anything. They are just being used here to separate ‘the person who runs the business’ from ‘the person who receives income’.
- Startup with an outside investor – The two founders hold A shares with full voting rights and full dividends. An investor puts in money and gets C shares, with no vote but a fixed dividend paid before anyone else. The C shares also give first claim among the shareholders on whatever is left if it all goes wrong. That C share is like a preference share, just given a letter instead of being called ‘preference shares’ directly.
- Employee reward scheme – A company gives a senior employee D shares as a bonus. These carry a right to dividends if the company does well, but no vote and no claim on existing capital, only on future growth. So the employee benefits if the business grows, without any control over how it is run and without a slice of value that already existed before they joined.
In every case, the letter is just a ‘tag’. What actually matters is the specific mix of voting, dividend and capital rights written into the company’s articles for that letter.
You can change the share structure and rights, but you must do it correctly. Under section 630 of the Companies Act 2006, you should first check the company’s own articles. If the articles say nothing about changing those rights, you must follow the default law. This means you must obtain written consent from holders of at least three-quarters (by nominal value) of the shares in that class. Alternatively, you can pass a special resolution at a separate meeting of only holders of that class. This protects minority or lower-rights shareholders (say, holders of non-voting shares) from having their position eroded by a vote of the majority who hold a different, more powerful class.
Once the special resolution is passed, the amended articles take legal effect immediately. The company must still send a copy to Companies House within 15 days, notify it of the change to the class rights within one month (form SH10) and properly document any required class consent. Where more than one class is affected, each class must give its own consent, so the paperwork multiplies.
Early Planning Avoids Future Upheaval
If you want to introduce multiple share classes, it is worth speaking to a company formation specialist. The same applies if you are planning a new company and want to structure it correctly from the start. A specialist can help draft articles that set out who votes, who receives dividends and who gets what if the company is sold or wound up. At Uniwide Formations, all our company formation packages allow you to form a limited company with several classes of shares from the outset.
Tags: Limited Company, Shares
