Understanding share classifications can be hugely important for any shareholder of a company. Our expert team is here to advise you on any shareholder related matter.
What are share classifications?
The majority of companies, particularly small or medium sized businesses have just one class of share, which is usually the ordinary share. The company will have been incorporated with ordinary shares, and the rights associated with those shares and the shareholders are usually set out in the company’s Articles of Association.
Other companies might decide to have two or more different classes of shares, to ensure a differentiation of share classes. If the shareholders consent then a company can have as many different share classes as it likes, and it is relatively straightforward to create a new share class.
The rights that are attributed to the different types of shares will be whatever the shareholders have agreed they should be (usually dependent on levels of investment) and are willing to accept.
It is not necessary for different classes to have different rights, but different share classes are often created in order to allow for different voting rights and different values of shares, depending on the shareholder investment.
Differences in share classifications
If there are different classes of shares within a company, then they may allow those shareholders the right to have either normal dividends or preferential dividends i.e. to be paid before other classes of shareholders or at a different level.
- there may also be different rights to capital distribution if the company is either dissolved or goes into members voluntary liquidation, when the company is still solvent;
- some shareholders may, depending on their class of assets, not be entitled to any distribution, or they may rank behind others depending on the class of shareholding.
Different classes of shares may also carry different weighted voting rights and therefore the higher the voting right the more the shareholder can have a say in matters affecting the company and decisions on the direction of the company.
In certain companies, there may be different classes of shares in order to attract new investment, to remove voting powers of certain individuals, or to increase these. They can be used by way of staff motivation, or to divide up dividend income in a certain way. It is down to the individual company, subject to statutory shareholders’ rights.
Shareholders’ rights
Shareholders have certain rights which are generally set out in company legislation, but which can also be modified depending on the particular company’s Articles of Association, or if a shareholders agreement has been drafted.
Basic rights include:-
- receipt of a share of the company’s profits.
- to inspect statutory books and records.
- to attend general meetings and to vote.
- to receive certain documents from the company such as the annual report and the accounts and copies of any written resolutions proposed by the directors or shareholders.
Disputes
If there is a difference in share classification which provides that any particular shareholder or shareholders have higher weighted voting rights or receive different or preferential dividends, then if not agreed fully between all shareholders in advance, this may lead to disputes amongst shareholders.
At Francis Wilks & Jones our company law experts can advise and assist you with regard to share classifications, both on set up or if changes are required throughout the company’s life. We have many years of experience on advising on share classes, and acting on shareholder disputes for all parties. Contact one of our team today if you have any concerns in this area. Please call any member of our team for your consultation now
