The Complete Guide to Creating Different Share Classes for Dividends: A Step-by-Step Approach

When structuring a company’s ownership and dividend distribution, creating different share classes offers significant flexibility and strategic advantages. A company can create more than one class of share, with each class having distinct rights, such as different voting rights or dividend entitlements. This comprehensive guide walks you through the entire process of establishing alphabet shares as multiple different types of shares to optimise dividend payments and ownership structures.

The creation of these classes of shares is defined and governed by the Companies Act 2006, which sets out the legal compliance requirements that must be strictly followed if the creation of shares is to be recognised as legally valid.

Understanding Share Classes and Their Benefits

Share classes represent different categories of ownership in a company, each carrying distinct rights and obligations. Shares within the same class generally have equal rights, while a different class of shares can have differing rights, such as variations in voting power or dividend entitlements.

The most common names given to new share types include A Ordinary shares and B Ordinary shares, though companies can create multiple classes using alphabet designations (A, B, C, D shares, etc.). It is important to note that there is no specific legal definition for what is a A Ordinary or a B Ordinary share. This is because the definitions are usually expressed in the articles of association, which may vary from company to company. Accordingly, we can name and define these shares as we wish (as long as we are within the boundaries of the Companies Act).

Different names for shares (which would then carry different assumptions about their rights) include Redeemable shares, Redeemable Preference shares, Preference shares,…

At Zoppi & Co, we create completely bespoke classes of shares that extend beyond simply allowing for different dividend rights. This comes at no extra cost to the client, and the below are some of the things that we would consider when creating alphabet shares.

To note:

–       Clients can customise their share classes by updating the below table as they wish. We will then draft the articles of association accordingly.

–       We suggest answers based on the type of recipient of such shares (founders, investors, family or management team), based on what our clients typically choose.

–       Further customisations can be made, upon request.

Key Benefits of Different Share Classes

Dividend Flexibility: Different share classes allow companies to distribute varying dividend amounts to different shareholders. For example, A Ordinary shares might receive higher dividend rates than B Ordinary shares, or certain classes might have preferential dividend rights. This structure enables companies to pay different dividends to certain shareholders, while shares of the same class participate equally in dividend distributions.

Control Structure: Share classes can carry different voting rights, allowing founders or key stakeholders to maintain control while raising capital or bringing in new investors. Creating different classes can also help protect minority shareholders and ensure fair treatment among other shareholders.

Tax Efficiency: Strategic dividend distribution across different share classes can optimise tax planning for shareholders in different tax brackets or circumstances. Unless otherwise specified, equal dividends are expected for shareholders within the same class (proportionally to the amount of shares held).

Investment Attraction: Multiple share classes can accommodate different investor preferences, such as growth-focused investors preferring shares with minimal dividends versus income-focused investors seeking regular distributions. Dividends are typically paid in proportion to each shareholder’s respective shareholdings and are drawn from the company’s profits.

Succession Planning: Family businesses often use different share classes to facilitate generational transfers while maintaining operational control.

Two Approaches to Creating Different Share Classes

Most companies start with a single class of shares, typically ordinary shares, which provide uniform voting and dividend rights. However, as a company grows or seeks to raise capital, it may issue more than one class of shares to tailor ownership structures and accommodate different shareholder needs.

Companies can establish multiple share classes through two primary methods:

Method 1: Redesignate (reclassify) existing shares
A company can redesignate (convert) some existing shares into a new class of shares. This approach is often used by new companies that have the support of the shareholders whose shares are being converted, but not that of other shareholders. Further, this approach is best if the intended recipient of the new class of shares remains the current owner of the existing shares.

Accordingly, this option is not preferred if the company wants to raise equity finance from investors, who will want to receive new shares directly from the company (as opposed to being sold existing shares from current shareholders). This may be for numerous reasons, including that stamp duty tax may be payable on the purchase of existing shares, but usually is not payable if the investor is subscribing for new shares directly from the company. Further, the seller may need to pay capital gains tax on the sale of existing shares, whilst the company would not need to do so if creating new shares.

Further, reclassifying shares within the same company can lead to potential disputes if shareholders are moved to a different class with varying rights, such as changes in voting power or dividend entitlements.

Method 2: Creating and issuing new share classes
The most common way is for the company to issue (create new) shares that are of a different class.

This approach involves creating and issuing entirely new shares, and of a new class. Here, existing shares remain broadly the same, but a new class of shares is detailed (usually in the articles of association), and new shares are issued. This is usually preferred when introducing new shareholders to the company, such as when raising equity finance or adding family members.

The below step-by-step guide is for method 2, namely creating entirely new (and additional) shares of a new class.

Step 1: Draft Bespoke Articles of Association

The foundation of creating different share classes lies in drafting comprehensive articles of association, which are the company’s written rules governing share classes and shareholder rights, and that clearly define each class’s rights and restrictions.

These articles must comply with company law to ensure the company’s share structure and shareholder rights are legally valid.

Essential Elements to Include

Share Class Definitions: Clearly specify each type of share (A Ordinary, B Ordinary, C Ordinary, preference shares, redeemable shares, deferred shares, etc.) and their nominal values. Examples include preference shares with fixed dividend rights and preferential treatment, redeemable shares that may be bought back by the company, deferred shares issued to founders or directors with dividends paid after other classes, and alphabet shares such as B shares and C shares, each with distinct rights as defined in the articles of association.

Dividend Rights: Detail how dividends will be calculated and distributed for each class. For example:

• A Ordinary shares might receive fixed, preferred dividends at a rate of 8% per annum.

• B Ordinary shares might receive dividends as the board of directors deems fit.

• C Ordinary shares might have no rights to dividends.

Voting Rights: Specify voting entitlements for each share class. Classes might have:

• Full voting rights (one vote per share on all matters).

• Multiple voting rights (multiple votes per share on all matters).

• Limited voting rights (voting only on specific matters).

• No voting rights on any matters.

Some classes may be non voting shares, while others carry voting rights.

Capital Rights: Define each class’s entitlement to capital distribution upon liquidation or winding up. Certain classes may have rights to assets left after debts are settled, and preference shareholders may be received ahead of ordinary shareholders.

Transfer Restrictions: Include any limitations on transferring shares between classes or to third parties. Are they subject to pre-emption rights?

Sample Article Structure

Your articles may include provisions such as:

“The issued share capital of the company at the date of the adoption of these articles is as outlined in the table below (the shares):

Each row of shares in the above table shall constitute a different class of shares for the purposes of the CA 2006 but, save as otherwise provided in these articles, all shares shall rank pari passu with each other in all respects.

The different classes of shares shall benefit from the various rights, and be subject to the various restrictions, as outlined in the table below.“

The prescribed particulars for each class of share, including rights to dividends, voting, and capital distribution, must be clearly set out in the articles.

Step 2: Pass Shareholder Resolution and Adopt New Articles

Once you’ve drafted the new articles of association, shareholders must formally adopt them through a special resolution. A special resolution requires 75% of the shareholders (if passed at a general meeting), or 75% of the voting shares (if it is decided to count according to shares, or if passed as a written resolution).

Resolution Requirements

Special Resolution: Adopting new articles requires a special resolution passed by at least 75% to be in favour.

Notice Period: Provide at least 14 days’ written notice to all shareholders, though 21 days is recommended for complex changes.

Meeting Documentation: Prepare comprehensive documentation including resolutions and accompanying articles of association.

Granting Authority to Issue New Shares

The resolution should also grant directors authority to issue the new share classes. This typically involves:

Section 551 Authority: Granting directors authority to allot shares under the Companies Act 2006.

Disapplication of Pre-emption Rights: If required, disapply statutory pre-emption rights under Section 570-571 to allow flexible allocation of different share classes.

Duration and Limits: Specify the duration of the authority (maximum 5 years) and any limits on the number of shares that can be issued.

Sample Resolution Text

“THAT, in accordance with sections 571 and 573 of the Companies Act 2006, the directors of the Company be authorised to allot equity securities (as defined in the Companies Act 2006) for cash under the authority given by that resolution and/or to sell ordinary shares held by the Company as treasury shares for cash as if section 561 of the Companies Act 2006 did not apply to any such allotment or sale. Such authority to expire (if not first renewed or revoked) at 5pm on the fifth anniversary of the passing of these resolutions, but prior to its expiry the Company may make offers, and enter into agreements, which would, or might, require such equity securities to be allotted after the authority expires and the directors may allot such equity securities under any such offer or agreement as if the authority had not expired.“

Further resolutions are required to comply with the Companies Act.

Step 3: Conduct Board Meeting to Issue New Shares

Following shareholder approval, the board of directors must formally resolve to issue the new share classes.

Board Resolution Content

Authority Confirmation: Confirm the board is acting within the authority granted by shareholders.

Allotment Details: Specify exactly which shares are being issued, to whom, and at what price.

Terms and Conditions: Confirm the shares are issued subject to the company’s articles of association.

Payment Requirements: Detail payment terms and confirm receipt of consideration.

Documentation Requirements

Board Minutes: Comprehensive minutes recording the resolution and decision-making process.

Allotment Resolution: Formal resolution detailing the specific share issuance.

Consideration Records: Documentation showing payment received for the new shares.

Sample Board Resolution

“RESOLVED THAT pursuant to the authority granted by the shareholders on [date], the Company allot and issue:

• [Number] A Ordinary Shares of £[nominal value] each to [Name] at a subscription price of £[amount] per share.

• [Number] B Ordinary Shares of £[nominal value] each to [Name] at a subscription price of £[amount] per share.

RESOLVED FURTHER THAT the Company Secretary be authorised to complete all necessary documentation and filings.”

Step 4: Issue Share Certificates and Update Internal Registers

Once shares are formally allotted, you must issue physical documentation and update company records.

Share Certificate Requirements

Share certificate content: Each certificate must show:

• Company name and registration number

• Shareholder name and address

• Share class and number of shares

• Nominal value per share

• Certificate number and date of issue (if applicable)

• Company seal (if used) or director signatures

Separate Certificates: Issue separate certificates for each share class to maintain clear distinction.

Updating Statutory Registers

Register of Members: Update to show each shareholder’s holdings in different share classes separately.

Register of Allotments: Record details of each share issuance including dates, consideration, and recipients.

Share Certificate Register: Maintain records of all certificates issued, including certificate numbers and dates.

Step 5: Update with Companies House

The final step involves updating the public register at Companies House through specific forms and filings.

Form SH01 – Statement of Capital

Filing Requirement: Submit Form SH01 within one month of issuing the new shares.

Information Required:

• Details of each share class including rights attached

• Number of shares in each class

• Aggregate nominal value

• Amount paid up and unpaid on each share

Additional Filings

Special Resolution: File a copy of the special resolution adopting the new articles of association.

New Articles: Submit the complete new articles of association showing all share class provisions.

Filing Deadlines and Fees

Deadline: Different filings have different deadlines, as short as 2 weeks from passing of the resolutions.

Fees: Usually, no fee is payable to Companies House when issuing new shares.

Electronic Filing: You may want to create a Webfiling account with Companies House and use the Companies House online services for faster processing and reduced fees.

Common Pitfalls to Avoid

Inadequate Articles: Ensure articles comprehensively cover all aspects of different share classes, including voting, dividend, and capital rights.

Regulatory Compliance: Ensure all filings are completed accurately and within statutory deadlines.

Record Keeping: Ensure the internal records are kept for at least 10 years and that they are produced in compliance with the Companies Act.

Conclusion

Creating different share classes for dividend distribution provides significant strategic advantages for companies seeking flexible ownership structures. By following this comprehensive seven-step process—from drafting bespoke articles of association through to Companies House filings—companies can successfully implement alphabet shares and establish distinct share classes such as A Ordinary shares and B Ordinary shares structures.

The key to success lies in thorough planning, comprehensive documentation, and meticulous attention to both legal requirements and practical implementation. While this guide provides a framework for the process, companies should always seek professional legal and tax advice to ensure their specific share class structure meets their strategic objectives while complying with all applicable regulations.

Whether you’re implementing different share classes for tax efficiency, control purposes, or investment attraction, this systematic helps ensure a compliant and effective implementation that serves your company’s long-term interests.