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Multiple share classes also known alphabet shares
Alphabet shares are different classes of shares issued by a company. Companies are usually formed by issuing one class of shares called “Ordinary shares” which have equal voting rights and equal rights to dividends and distributions. However, shareholders may agree to have different classes of shares with different rights attached. The different rights may relate to voting rights or dividend and distribution rights. To distinguish each class of shares issued, they are given letters of the alphabet. A company may issue A Ordinary shares, B Ordinary shares, C Ordinary shares, and so on. Each class of shares may have different rights attached.
Below is an example of a company formed with only 1 class of shares;
Company A Ltd is formed with 100 ordinary shares of £1, fully paid up. The shares are issued to 3 shareholders;
Mr. Smith gets 20 ordinary shares of £1
Mr. Jones gets 35 ordinary shares of £1
Mrs. Doe gets 45 ordinary shares of £1
When the shareholders vote on a matter, Mr. Smith has 20 votes, Mr. Jones has 35 votes, and Mrs. Doe has 45 votes. Whichever 2 shareholders agree on a vote will decide the issue, if it is not unanimous.
If the company issues a dividend of £100, Mr. Smith will receive £20, Mr. Jones will receive £35, and Mrs. Doe will receive £45
Below is an example of a company formed with 2 classes of shares;
Company X Ltd is formed with 100 A Ordinary shares of £1, fully paid up and with full voting rights and 100 B Ordinary shares of £1, fully paid up but with no voting rights. The B ordinary shares are entitled to a preferential dividend of £1 per share before the A ordinary shares are entitled to any dividend.
Mr. Smith gets 20 A ordinary shares of £1
Mr. Jones gets 35 A ordinary shares of £1
Mrs. Doe gets 45 A ordinary shares of £1 and 100 B shares of £1
As in the first example, when the shareholders vote on a matter, Mr. Smith has 20 votes, Mr. Jones has 35 votes, and Mrs. Doe has 45 votes. Whichever 2 shareholders agree on a vote will decide the issue, if it is not unanimous. If the company declares dividends of £160, Mr. Smith will receive £12 (being 20% of £60), Mr. Jones will receive £21 (being 35% of £60), and Mrs. Doe will receive £127 (being £100 in respect of the B shares and 45% of £60 attributable to the A shares)
Terminology
There is some unusual jargon associated with share capital, and a brief explanation is given below:
When are shares issued?
Why do companies issue multiple share classes?
Legal and Tax Advice
It is easy to issue shares of different classes. However, we do suggest you always get legal and taxation advice on these matters. The consequences of not doing so can be expensive. If not done correctly, company owners can jeopardize the right to Entrepeneur’s Relief when they sell a company or pay higher rates of tax on distribution of profits or even lose control of their own companies.
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