How to create different classes of shares in a UK limited company: step-by-step tutorial

Creating different classes of shares in a UK limited company is a paperwork exercise rather than a difficult legal one, provided you do the steps in the right order. The share rights go into the articles of association, the directors and shareholders approve the issue, the new shareholders get certificates, and Companies House is told. This is the process I use with my own template pack, step by step.

Why create different classes of shares?

There are four main reasons a company creates more than one class of shares:

• Retain voting rights. If the other shares you create carry no voting rights, or fewer voting rights than yours, you keep control.
• Flexible distribution of profits. You can declare different kinds of dividends, or different amounts, for different classes of shares.
• Redeemable shares. You can make a class redeemable so the company can buy the shares back if it wants to. For example, if you give shares to an employee who later leaves, and leaves on bad terms, you can specify that the company can buy those shares back.
• Preference shares for investors. Investors often want preference shares, which guarantee them a rate of return while letting you raise equity finance.

The templates I use are custom articles of association that let you create alphabet shares (different classes for different shareholders), make shares redeemable if you want, create preference shares for investors, and specify whether each class carries voting rights or not. The rest of this guide assumes you are working through documents A to F in that pack, but the steps are the same whatever documents you use.

Creating share classes on incorporation

If you are creating different classes of shares as part of setting up a new limited company, you only need to focus on drafting the articles of association. Finalise the articles, then use them when incorporating at Companies House.

Companies House will ask whether you want to use bespoke articles or the model articles. Choose bespoke and upload the ones you have drafted. The online questionnaire will also ask about the different classes of shares you are creating. Simply follow it, and make sure your answers match what is in the articles. If the articles create a base ordinary class plus A ordinary and B ordinary shares, you need to create and allot those same classes in the questionnaire.

Adding share classes to an existing company

The rest of this article assumes the company already exists and you now want to create additional classes of shares, for investors or family members. There are 11 steps. The first five prepare the documents, steps six to ten execute them, and step eleven is the Companies House filing.

Share applications (step 1)

• Step 1: share applications (document A). Each person who will receive the new shares signs their own application asking the company to allot them. You can draft it as the company and ask them to sign and return it. It sets out the company's details, the subscriber's name and address, and the number and type of shares they are applying for. Repeat for every new subscriber.

Amend the articles of association (step 2)

• Step 2: amended articles of association (document B). Insert the company name and number. In my template the amendments sit in two places, a table at article 30 and the rights at article 32, and you can find every amendment point by searching for a square bracket. The template is the model articles, slightly amended to make creating different share classes easy.

In the article 30 table you add or remove rows depending on how many classes the company has, then specify for each class the nominal value of the shares and how many are in issue. The issued share capital is the sum of nominal value multiplied by number of shares across the classes. If there are 100 ordinary shares of £1 each, the share capital for that class is £100. If one class instead had a nominal value of £2 and 100 shares in issue, that class contributes £200.

Nominal value and market value are very different. Nominal value is typically just £1, and it is the amount the shareholders must contribute to pay off creditors if the company goes under. Market value is what someone will pay for the share. So if an investor pays you £100 per share, the nominal value will likely be £1 and the premium, what they pay on top of the nominal value, will be £99.

Article 32 is where you specify the rights and restrictions attached to each class. For example, do the ordinary shares, typically held by the founders, carry a right to vote? To say yes, remove the square brackets; to say no, put no. You can customise this as much as you want, within the confines of the law.

Board minutes to issue shares (step 3)

• Step 3: board minutes (document C). This is standard. Search for the square brackets and replace them and the suggested text with your information: company number, company name, where the meeting was held and so on.

Written resolution (step 4)

• Step 4: written resolution (document D). This is the shareholders' resolution adopting the new articles and approving the issue. Again, the square brackets show where information is needed, and I have drafted it so you need to input as little as possible.

Share certificates (step 5)

• Step 5: share certificates (document E). Produce one per shareholder receiving new shares. If you have three new shareholders, each gets a certificate stating their details, the number of shares and the class.

Board meeting and signing (steps 6-9)

Up to step five you have only prepared documents. Now you execute them.

• Step 6: hold a board meeting. The directors discuss whether the board is for or against issuing the different classes of shares.
• Step 7: shareholders sign the written resolution. If the board is in favour, the shareholders are asked whether they are also in favour, and they sign the written resolution from step four.
• Step 8: the chair signs the board minutes. Once the resolution has been signed by the shareholders, the chairperson signs the board minutes from step three.
• Step 9: sign and deliver the share certificates. Typically two directors, or a director and a witness, or a director and the company secretary, sign each certificate, and it is delivered to the relevant shareholder.

Update the statutory registers (step 10)

• Step 10: statutory registers (document F). The registers are an internal document, much like a spreadsheet, recording who the shareholders, directors and persons with significant control are. Once you have listed every shareholder in the register of members, with their residential address and the amount and type of shares held, the internal documentation is finished.

File form SH01 at Companies House (step 11)

• Step 11: file at Companies House. There are three filings: the written resolution, the new articles of association and form SH01. Filing electronically is typically easier and quicker than paper copies by post. For the resolution, sign in to your Companies House account, enter the company registration number, select change of constitution, then resolution, enter the company's authentication code and upload the signed resolution. Repeat the same process for the articles, selecting articles instead of resolution. Then, through WebFiling, go to all forms, then share capital, then return of allotment of shares, and complete the SH01 questionnaire.

If you have issued enough shares that someone becomes a person with significant control, you will also need to file the relevant PSC form to update Companies House.

Next steps

Decide what you want each class to do, who gets votes, who gets dividends and whether anything is redeemable, before you touch the documents. Then work through the eleven steps in order. If you are still deciding how to structure the shareholding, ordinary shares vs preference shares and classes of shares explained will help, and for anything beyond a straightforward issue, speak to a corporate solicitor.