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A and B Shares (Multiple Share Classes): Positives and Negatives

09th September 2010
By James Quinn in Legal
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There are several advantages to creating A and B shares in your company. One is that you get complete control over the amount and timing of dividend payments to shareholders. You can also independently establish the rights of each class of shareholder: you may limit or denying voting rights; enhance or limit the right to a return of capital on winding up; and award certain shareholders a prioritised return of capital over others. If you consult one of the more sophisticated formation agents, you will be able to form a company with multiple share classes.

The name you give to a class of shares can be misleading, since it does not necessarily accurately describe the rights attaching to the relevant shares. But there are certain naming practices that have evolved over the years. For instance, the name 'preference' shares is given to those shares that have preferential rights attached: to a prioritised return of capital, or to fixed dividends, perhaps. Another example is the names given to shares with similar, but subtly distinct rights, such as the ability to declare a different dividend on each class. These are commonly labelled 'A' ordinary, 'B' ordinary, etc shares, or 'A and B shares'.

To set out the rights of the A and B shares, or any other class of shares you wish to create, you will need to adopt appropriate Articles of Association. All share classes will be treated as having equal rights, no matter what you call them, unless you do this. Model form Articles of Association will not be appropriate. Completing Companies House Form SH08 will not suffice. Drafting Articles of Association is not easy; it is a specialist practice requiring the work of an experienced professional.

There are various requirements for the adoption of new Articles of association:

- pass a special resolution of the members, and if the current Articles require, satisfy any stricter requirements;

- provide notice of name or other designation of class of shares, Form SH08 at Companies House; and

- obtain the consent of all existing classes of share, if required.

If you want to issue new shares immediately after creating a class of shares, you also need to return the allotment of shares form (SH01) at Companies House, and appropriate Directors and Shareholders resolutions have to be passed. On the Form SH01 you will need to provide certain information, such as the rights you are attaching to the classes of shares (known as the 'prescribed particulars'), the intended allotment, and a revision of the company's share capital.

It might be the case that your ability to issue shares or to create new classes of share is limited by the terms of a pre-existing agreement between your shareholders. Equally, it could be the case that there are pre-emption rights included in the Articles, such that your new shares must be made available first to your current shareholders. The amount is likely to be proportional to their currently holdings.

The introduction of shares of a new class may mean that any rights or restrictions applying to share transfers in the Articles or any shareholders agreement will have to be either complied with or amended. For example, if a certain class of shareholder with a right to a dividend wishes to sell his/her shares, the other shareholders in that class might require that those shares are first offered to the other members of the class.

Be aware that any amendment to rights attached to current share classes or through the introduction of new classes - this could lead to a claim of unfair prejudice or equivalent legal remedy. Again, in order to make changes to the rights attached to a class of shares you need the consent of the relevant class shareholders. This, of course, is not a problem if you get the unanimous consent of all shareholders to the amendments to class rights or to the creation of the new share classes.

Make sure you make enquiries with your tax advisor as to whether A and B shares will make your company more efficient.

If you are contemplating multiple share classes, such as A and B shares, for your company, first consider the rights you wish to assign to each share class. Then secure resolutions from both shareholders and directors. Make sure that agreements have been suitably amended, and adopt new Articles of Association if necessary. Finally, you have to complete and return the relevant Companies House forms.

The details given in this piece are designed to provide a general guide only. This article is not intended to be exhaustive or relevant to everyone's situation.

James Quinn write the Article 'A and B Shares (Multiple Share Classes): Positives and Negatives' and recommends you visit the Legal Clarity website for more information.

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