The Advantages and Disadvantages of A and B Shares (Multiple Share Classes)

A and B shares (ie multiple share classes) are an option for your company with the following distinctive benefits:

- gaining control over the amount, as well as the timing, of the dividend due to each class of shareholder;

- granting, or taking away, voting rights of the various classes of shareholders;

- limiting or denying certain shareholders the right to a return of capital on winding up;

- enhancing the rights of one class of shareholders, such that they receive a return of capital or a fixed dividend before another class of shareholders.

You can form up a company with multiple share classes from incorporation (registration). This is a service available from solicitors and certain company formation agents.

Giving a certain name to a class of shares does not determine the rights attached to them. As a result the names of share classes are sometimes deceptive. Nevertheless, there are some typical associations that tend to hold true. Shares with similar rights but minor differences, for instance, are usually separated into the categories A' ordinary, B' ordinary classes, and so on. The minor differences could be in the possibility of declaring a different dividend on each class. Another example is the name preference' shares, which is given to those shares that have preferential rights attached: to a prioritised return of capital, or to fixed dividends, perhaps.

In order to establish the rights of the various classes of shareholder, whether they hold A and B shares or any other class of shares you want to create, you will have to adopt suitable Articles of Association. All share classes considered to have identical rights, regardless of what name you give them, unless you do this. You will not be able to set out various classes under model form Articles of Association. You will have to use the services of a specialised professional with experience in order to have an adequate Articles of association drafted. In particular, it is noted that processing the appropriate Companies House Form SH08 on its own is not enough.

A special resolution will be necessary in adopting new Articles of Association, although the current Articles might specify more stringent requirements.

Other requirements are as follows: if the company already has multiple share classes, you may need to obtain the consent of the relevant shareholders; a form must also be completed and filed, known as Company House Form SH08, which is a notice of name or other designation of shares.

It could be the case that you want to issue new shares at the same time as soon as you have created a new class of shares. If so, you will need to pass relevant Directors and Shareholders resolutions, as well as file Companies House Form SH01 - a return of allotment of shares. Form SH01 requires that you give certain details regarding the allotment, your company's revised share capital and the rights associated with all of the classes of shares (also known as prescribed particulars').

Your shareholders might have entered into an agreement that restricts your freedom to establish new classes of shares (such as A and B shares) or issue shares. It is also possible that the Articles of Association include pre-emption rights, whereby a shareholder is entitled to priority in buying a number of new shares that is proportional to the number that he or she already holds.

You also have to comply with or amend any rights or restrictions relevant to share transfers in the Articles or any other shareholders agreement. The introduction of a new share class could demand that these restrictions be amended. For instance, when a holder of a class with a right to a dividend might want to sell his shares, the other shareholders in the same class may not want other classes of shareholders (holders of classes without the right to a dividend, say) to be able to have them.

When an existing shareholder's interests are compromised by an alteration of the rights attached to their class of shares, or by the introduction of a new class, it is possible that he or she has legal remedy (e.g. unfair prejudice). Once again, you need the consent of a class of shareholders in order to amend or make alterations to the rights attached to their holdings. If you manage to get all shareholders to consent to the creation of new share classes or to amendments to existing rights, you will avoid most of these issues.

Sometimes having multiple share classes can improve a company's tax efficiency. In order to find out whether this is the case for your company, you ought to ask your tax advisor.

So, there are several things to remember when considering the implementation of multiple share classes for your company. These are the most fundamental:

- fully evaluate the rights attaching to each class of shares;

-obtain the consent of shareholders;

- file the appropriate forms with Companies House;

- adopt new Articles of Association and amend any existing agreements.

The expressions and advice in this article are intended as a general guide only. They do not cater for all individual circumstances.

The Advantages and Disadvantages of A and B Shares (Multiple Share Classes)

By: James Quinn

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