How to create different classes of shares in compliance with the Companies Act 2006

Creating different classes of shares gives you more control and flexibility over how you run your company. The question is how to actually do it, and what you must do to stay compliant with the Companies Act 2006. This is the eleven-step process I have used for clients, using a step-by-step guide and a set of template documents (A to E). Steps one to five prepare the documents, steps six to ten put them into effect, and step eleven is the filing at Companies House. At the end I cover why you will probably want a shareholders' agreement once the new shares are issued, and three mistakes to avoid when drafting it.

Share application (step 1)

• Step 1: draft the share applications (document A). Each shareholder who is to be issued the new class of shares applies for them in writing. As with all the templates, you remove the square brackets and replace them with your own information, starting with the company's name.

Amend the articles of association (step 2)

• Step 2: draft amended articles of association. If you already have bespoke articles, you amend those. If you are using the model articles, meaning you have never uploaded or amended your articles, download the model articles from the government website and work from them.

My expert tip is to insert the different classes of shares into the model articles as a new article after article 29. I start by setting out the state of the company's share capital: how many shares there are in each class. Then I build on that with a separate article for each share class explaining what that class is like. Does it have the right to vote? The right to dividends? The right to tag along? And so on. That way anyone reading the articles can see the capital structure first and the rights of each class immediately after.

Board minutes to issue shares (step 3)

• Step 3: draft the board minutes (document B). The board minutes approve the amended articles and ask the shareholders to allow the directors to create and issue the new classes of shares. Board minutes, the record of the decisions of the board of directors, are a legal requirement under the Companies Act 2006. The template gives you two classes, A ordinary and B ordinary, but you can name them whatever you want and make them whatever you want them to be.

Written resolution (step 4)

• Step 4: draft the written resolution (document C). The shareholders approve the transactions by special resolution, which means either 75% of the shareholders or 75% of the voting shares must be in favour.

There are two ways to get that consent:

• At a general meeting. You can hold an actual meeting of the shareholders, but you will need to serve notice, usually 21 days, wait for that period to elapse and then hold the meeting.
• By written resolution. The quicker and easier route. You give the document to the shareholders who are present, or send it to them for electronic signature, and once the 75% threshold is met the resolution has passed.

In the written resolution template you specify which article number of the new articles deals with each class of shares, and you create a signature space, with their name, for every shareholder in the company.

Share certificates (step 5)

• Step 5: draft the share certificates (document D). Share certificates are a great way to evidence title to, or ownership of, shares. Prepare one for each shareholder receiving new shares, replacing the square brackets as usual.

Up to this point you have only drafted documents in advance of the meetings. Now you put the procedure into effect.

Hold the board meeting (step 6)

• Step 6: call the board meeting. Call a meeting of the directors, giving notice if your articles require it. At the meeting the board votes on the resolutions, including the adoption of the new articles that define the different classes of shares and the authority to allot shares of a new class.

Do not end the board meeting and then go to the shareholders. Instead, during the board meeting, pause to let the shareholders sign the written resolution, ideally right there and then. Then reconvene the board meeting, confirm that enough shareholders have approved, and close the meeting.

Sign the resolution and minutes (steps 7-8)

• Step 7: the shareholders sign the written resolution. Enough shareholders sign to reach the 75% threshold.
• Step 8: the chair signs the board minutes. Back in the board meeting, the chairperson signs the minutes confirming that enough people have voted and the resolutions have passed.

At this point the board and the shareholders are in agreement. The shares now actually need to be issued.

Sign the share certificates (step 9)

• Step 9: sign and deliver the share certificates. The certificates prepared at step five are signed and delivered to the shareholders.

Update the statutory registers (step 10)

• Step 10: update the statutory registers (document E). If you do not have statutory registers, do not worry. It is unfortunately very common for companies simply not to have them, usually because nobody realised that companies really do need to keep internal registers. They are simple spreadsheets recording important information about your company: the members in the register of members, the persons with significant control and the directors. Here you add entries for the new shareholders holding the new classes of shares.

File form SH01 at Companies House (step 11)

• Step 11: file at Companies House. There are three things to file. The shareholders' written resolution is uploaded through the Companies House online service, and the same route is used to upload the new amended articles of association. Then log in to your WebFiling account, click all forms at the top right and select form SH01, the return of allotment of shares.

Once that is done, you have created a different class of shares in compliance with the Companies Act 2006, and you are among the few who are actually compliant in practice.

Why you need a shareholders' agreement

If you are issuing different classes of shares, you are very likely not a one-person company any more. You have different shareholders, and that means you should at least strongly consider having a shareholders' agreement in place. It clarifies the shareholders' obligations and helps make sure the company is looked after properly.

My first piece of advice is to take independent legal advice and have a professional draft it. Beyond that, these are the top three issues to avoid.

Drag-along rights

Include drag-along provisions. In simple terms, if enough shareholders are willing to sell to a third party, they can drag along and force everyone else in the company to sell their shares to that third party too.

The reason is that you, as founder, may be bringing in smaller investors as minority shareholders while your ambition is one day to sell to a private equity buyer. A buyer like that will typically want the entire company. You do not want to jeopardise that deal because a minority shareholder refuses to sell.

What is a deed of adherence?

The second mistake is not including a deed of adherence, and not obliging a shareholder who sells to a third party to make that third party sign it.

A deed of adherence is simply the way a new shareholder agrees to be bound by the existing shareholders' agreement. You want to be sure that if any current shareholder sells their shares in future, the buyer has to adhere to the agreement everyone else has signed. Otherwise the agreement slowly stops covering the people who actually own the company.

Align the agreement with your articles

The third mistake is not checking your articles of association against your bespoke shareholders' agreement. Make sure there are no conflicts between the two. If there are, you will need to amend your articles to remove them, following the same special resolution route described above. For the wider question of what to put in the agreement, see how to structure a shareholders' agreement.

Next steps

Work through the eleven steps in order, and do not skip the registers or the Companies House filings, because those are where compliance is usually lost. Once the new shareholders are in place, have a corporate solicitor draft a shareholders' agreement that includes drag-along rights and a deed of adherence, and check it line by line against the articles.