Share classes

(Note: this guidance page is being re-written in view of recent law changes. Some provisions referred to may have been repealed. UKcorporator's incorporation process however remains perfectly valid and effectual.)

Most companies will have only one class of shares, for example, 'Ordinary Shares of £1 each'. This is very likely to be appropriate if the company only has one shareholder or the shares are held by, say, a husband and wife.

A public company must include shares having a nominal value of at least 50,000 pounds sterling in its authorised share capital - sections 117 and 118 of the Companies Act 1985. This requirement is not satisfied by including as part of the authorised capital a class of shares having an equivalent or greater value in another currency (e.g. one million ordinary shares of US$1 each).

The company's memorandum of association (which UKcorporator will produce for you if you wish) is required to set out the authorised share capital of the company. An example of this is as follows:

The share capital of the company is £100,000.00 divided into:
60,000 ordinary shares of £1 each, and
20,000 preference shares of £2 each.

In the above example the company would be formed with two initial classes of shares, i.e. ordinary shares of £1 each and preference shares of £2 each.

The articles of association implied by law if articles are not lodged at Companies House (e.g. Table A for a company limited by shares) and the articles of association which UKcorporator will produce for you if you require, contain provisions allowing the company to increase its authorised share capital and / or to change the designation of its authorised share capital (e.g. regulation 32 of Table A and also section 121 of the Companies Act 1985 which permits such alterations if allowed by the articles). This means that the company can subsequently alter its authorised share capital if the choices you make about this now when forming the company prove later to be unsuitable for some reason.

There are various reasons why it might, in certain circumstances, be appropriate to have different classes of shares. For example, in a small trading company, it might be desired to confine control of the business to a certain person (or persons). Such person/s can be allotted a particular class of shares which have greater voting rights than other classes. A company which needs to raise new share capital may decide to offer shares with preferential dividend rights so as to encourage investment.

A company may issue shares which differ, from class to class, in any lawful fashion chosen by the company. They may, for example, differ as to any or all of the following rights:

Entitlement to a dividend,

Entitlement to a dividend in priority to holders of other share classes,

Voting rights,

Right to payment of capital on a reduction of capital,

Entitlement to priority in repayment of capital in a winding up,

Rights to payment of dividends missed whilst the company was a going concern,

Rights to participate in a distribution of surplus assets after repayment of capital.

Certain sets of share rights have been adopted so frequently over the years that the shares so distinguished have come to be known by special names. The precise rights attaching to different share classes in a given company will usually be set out in the articles of association (or alternatively will be notified by the company to Companies House by lodgment of an appropriate statement, resolution or agreement - sections 128(3), 129(2) and 380 of the Companies Act 1985).

Some examples of the well known categories of shares are as follows.

Ordinary shares
Most companies have only one class of shares - ordinary shares. Ordinary shares are by far the most common type of share. For example, the vast majority of shares listed for sale on the London Stock Exchange are ordinary shares.

Ordinary shares have no unusual rights attached to them, for example, special preferential voting or dividend rights which a preference share might have, or a right to redeem the share which a redeemable preference share might have. Shareholders of ordinary shares have the normal and ordinary rights as set out in various sections of the Companies Act 1985 and various rights as developed by the courts over the last few hundred years.

Preference shares
These shares take preferential rights over ordinary shares, usually in respect of dividends and / or repayment of capital in a winding up. The dividends may be cumulative, meaning if they are unpaid, the unpaid amount will accumulate and must be paid before any dividend can be paid on the ordinary shares.

Redeemable shares
Shares may be issued as redeemable (i.e. able to be bought back by the company) at the option of the company or the shareholder or on a certain date, provided that at the time of the issue, there is at least one other class of issued shares in the company which is not redeemable - section 159 of the Companies Act 1985.

The redemption of the shares involves a repayment by the company to the shareholder of the capital subscribed for the shares, in return for which the shares are cancelled. This is one method of reducing the capital of of the company without seeking the consent of the Court.

The statutory provision allowing the issue of redeemable shares (i.e. section 159(1) of the Companies Act 1985) does not extend to unlimited companies, however, as the statutory prohibition on a company acquiring its own shares only applies to companies limited by shares or by guarantee with a share capital (section 143(1) of the Companies Act 1985) there is in reality no reason why an unlimited company may not issue redeemable shares. Furthermore, the statutory restrictions (sections 160(1) and 171(1) of the Companies Act 1985) imposed on limited companies as to the manner in which redeemable shares may be redeemed, are not applicable.

Convertible shares
Convertible shares are shares which are expressed to convert into a different class of shares upon the happening of a certain event. They can be used to transfer rights between various shareholders.

Participating shares
These shares carry the right to a dividend if the company's profits reach a certain level (or some other financial target is reached)

Deferred or founder's shares
These shares only qualify for consideration for a dividend or rights to receive a return of capital after a certain prescribed minimum has been paid to every other class of shareholder. They are sometimes also referred to as management shares.

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