Company Formation With Multiple Share Classes

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:

• Shares - A company's capital is divided into equal units of ownership known as shares. The number of shares held in a company indicates the total stake a shareholder has in that company.
• Statement of capital – To register a company, Companies House requires a Statement of Capital. Our online system submits this when you make your application. The statement of capital should be updated each time a company issues more shares of the same class or a different class of shares.
• Ordinary shares – All shares are ordinary if they do not have special terms attached to them. So, some shares may have other rights, such as the right to be redeemed or a preferential right to a distribution of profits or capital (the B shares issued to Mrs. Doe in the second example above gave her the right to a preference dividend before the holders of the A ordinary shares were entitled to a dividend).
• Nominal value – When a company is formed, each share is given a value (usually £1), which is the amount the shareholder must pay the company for his or her shares. The contribution need not be made when the company is formed, but it is owed by the shareholder to the company until it is paid. Subsequent share issues obligate new shareholders in the same way.
• Share capital – The total amount of money raised by issuing shares is the share capital of the company.

When are shares issued?

• During company formation - The founders (first shareholders) of the company agree on their contributions to the share capital of the company and submit a statement of capital showing the number and value of shares issued and to whom they are issued. This information is submitted with the application to form the company.
• When the shareholders vote in favor of an amendment to the share capital of a company - Established companies frequently change the structure of their share capital, usually to raise additional funds but not always.

Why do companies issue multiple share classes?

• Tax can be a motivation in family companies, for instance- Family-owned companies often issue shares to spouses and other family members to allow the distribution of profits in such a way that allows them to utilise lower tax rates or take advantage of the £2000 annual dividend exemption. Classes of shares can be created for each family member as required and different dividends voted for each class of share. The shares issued need not have any voting rights.
• To offer new members a financial stake in a company without commensurate voting power. The leading technology companies are a prime example of this. Founders of companies such as Facebook, Google, and Uber will sell huge stakes in their companies to the public or third-party investors but retain a disproportionate level of control over the running of a company by varying the rights of the issued shares. The terms of each issue normally include a condition that gives new shareholders more voting control when “things” go wrong.

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.