When setting up or growing a private limited company, one important decision to make is how its share capital will be organised. The ways that shares are classified, structured and issued to shareholders can affect several important functions of a company including control, profit distribution, and investor returns. Understanding how share capital can be structured and how the rights attached to different share classes can be varied is therefore essential for founders and investors alike.
This article explores the concept of share capital, how share classes can be defined, and the classes of shares commonly used in private limited companies.
What is share capital?
Broadly speaking, a company’s share capital is the total amount of money that has been invested by its shareholders in exchange for issuing shares, whether on, or after, the company’s incorporation.
The law requires a private limited company to issue at least 1 share at its incorporation, but it is common for companies to issue more. Common amounts are 10, 100 or 1,000 shares as this makes ownership percentages easier to calculate and allows for greater flexibility if new investors are introduced or if part of the company is sold in the future.
Each share in a limited company with a share capital must have a fixed nominal (or “par”) value per share, for example £1.00. Any purported allotment of a share without a fixed nominal value will be void. This nominal value is the minimum the share can be allotted for; the actual (market) value of the share can be much higher, with the excess constituting a share premium.
What is a share class?
Share classes are determined by the rights attached to each share, and a share will be considered to be within one class if the rights attached to them are in all respects uniform (s629(1) Companies Act 2009) ("CA 2006"). Accordingly, shares will be considered to be in a separate class if the rights attached to it differ from those attached to other shares (except where the only difference relates to dividend rights in the first 12 months following allotment (s 629(2) CA 2006). Whether the rights attached to different shares are uniform can require careful assessment of the companies’ constitutional documents.
Importantly, it is the rights attached to a share, not its name, that determine whether it forms a separate class. Those rights are typically set out in the company’s articles of association and, in some cases, shareholder agreements. Share classes are often given different names as it is desirable to differentiate between share classes, shareholders or investor groups.
Where a company has only one class of shares, these are usually called ordinary shares. Other share classes (such as preference or deferred shares) are typically structured by reference to the ordinary shares, either ranking ahead of them (for example, in priority to dividends and capital) or behind them.
A company may also have several classes of ordinary shares (e.g. A ordinary shares and B ordinary shares), which may each constitute a separate class with rights and liabilities that differ from the others.
What are the most common types of share class?
There is no universal standard set of share classes set out in the Act, although the Act does recognise and regulate certain categories of shares or rights for particular statutory purposes.
Below are types of shares that are commonly used in private limited companies, each with typical rights attached.
Ordinary shares – these are the most common class, and will typically carry equal voting rights, equal rights to dividends, and equal rights to share in surplus capital on winding up or a sale of the company.
Preference shares – these usually give their holders preferential rights over ordinary shareholders. This can include preferential rights to receive dividends or priority on a return on capital, or both. Preference shares can also have limited rights when it comes to voting.
Deferred shares – these will typically carry limited immediate rights for their holders. For example, they may carry no dividend rights until specific performance targets or time periods are met. Such shares are commonly used in more complex structuring arrangements or long-term incentive planning.
Redeemable shares – these are shares which the company can buy back (redeem) from a shareholder at a future date, or the shareholder can request the company to repurchase them, usually for a set price. They can provide a flexible way to return capital to investors without declaring dividends and are sometimes used as a hybrid debt/equity instrument.
Non-voting shares – these usually provide rights to dividends and/or capital but do not carry voting rights. They are often used for incentivising participants (such as employees or family members) without altering control of the company.
Management shares – these may carry enhanced voting rights, for example multiple votes per share, in order to, for example, ensure key individuals retain control of the company.
Why is it useful to have different share classes?
Having different share classes allows a company to effectively tailor rights to suit different shareholders. For example:
- Founders may wish to retain voting control over the company while raising investment.
- Early investors may want to negotiate priority for their financial rights.
- The company may wish to grant its employees non-voting shares as part of an incentive scheme.
Different share classes can therefore provide flexibility to balance control and economic return in a way that suits the company’s strategic objectives.
How do I set up different share classes?
There are two main ways to create or alter share classes. The first is to issue new shares in a new class with distinct rights. The second is by converting or redesignating existing shares into a different class with varied rights.
Before doing so, the company needs to check its articles of association to ensure the directors have the necessary authority to create or vary share classes. If not, the articles may need to be amended by shareholder resolution.
The rights attached to shares will usually be set out in the company’s articles of association. In circumstances where the rights attaching to different share classes become complex, careful drafting and consideration is required and professional advice should be sought before implementing changes to share capital.
Role of Culbert Ellis
Culbert Ellis can advise on all aspects of share structuring for private limited companies including:
- advising on share class rights, investor rights and preference arrangements;
- drafting and amending articles of association;
- creating and documenting new share classes; and
- managing companies house filings and other corporate law compliance requirements.
By taking a strategic and commercially focused approach, Culbert Ellis advises clients on building share structures that align with their business goals while ensuring full legal compliance.
How To Get In Contact
To find out more or if you require assistance with these matters, speak with our Corporate Team on +44 (0)204 600 9907 or email info@culbertellis.com.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
