What are Multiple Share Classes and When Should They be Used?
Most companies will find that having one share class is easier to manage, this is because all shareholders have the same voting rights at shareholders' meeting, also dividends are in proportion to the shares issued.
So what are the multiple share classes? The most common form are Alphabet Shares, this is where the classes are labelled as "A", "B", "C", etc. By having Alphabet Shares the company is able to give groups of shareholders different rights. There are no limits on the number of share classes a company can create, and the rights can vary in terms of:
- Voting rights
- Rights to dividends
- Rights to capital
- Rights or restrictions on the transferring of shares
- Special rights e.g. conferring the ability to appoint / remove directors on a particular share class.
The company can create two or more share classes that have exactly the same rights, however this is adding complexity without any real benefit.
There are no rules on which rights any of the share classes can have. Which effectively means the possibilities are endless, although there are common types (for more information check out this article by the Company Law Club) which combine certain rights, and allows a certain outcome for the shareholder. Remember: Simple is best, your company administration will need to be able to keep track of all the different share classes and what they mean.
How do they operate?
In some cases, multiple share classes can operate independently of one another. For example, a dividend can be declared on one share class but not another. However, in most circumstances they are interdependent.
Shares can also be ordinary shares or preference shares. Most companies will often have only ordinary shares as defined in the model articles. These usually have only 1 voting right per share, but can be changed in the Articles of Association. On the other hand, preference shares have a priority over dividend payouts (e.g. a percentage of the profit).
Take the example of a company having three different share classes, each with their own dividend and voting rights.
|Share Class||Number In Issue||Voting Rights|
|Ordinary "A"||100||One Vote Per Share|
|Ordinary "B"||70||No Voting Rights|
|Preference "C"||30||Five Votes Per Share|
In this example, each "A" share carries one vote, in a company with only one share class and 100 shares in issue, this would mean a single share provides 1 out of 100 votes, meaning 51 votes gives gives the majority. However, in the above scenario, there are 30 Preference "C" shares, each of which giving 5 votes. Say a vote was needing to be passed for a certain issue and 20 Class "A" shareholders and 20 Class "C" shareholders voted the same way - that would give 120 votes the one way. The remaining shareholders all vote the other (80 Class "A" and 10 Class "C") which would give a vote of 130 which is the majority. So even though there are more Class "A" shareholders, because their shares give them less voting rights it's a closer result than it first looks.
While there are also Class "B" shares, these have no voting rights, but they may have greater rights in other areas, such as dividend payments. Remember - these can be defined to suit the company, through their Articles of Association.
How Can I set Up Multiple Share Classes
A company's Articles of Association will need to have a section allowing multiple share classes. This is not supported in the Model Articles, and it is always worth seeking professional advice before changing your Articles of Association to see if the benefits are worth it for your company.
When adding share classes to your company you will need to pass a special shareholders' resolution which authorises a change to the Articles of Association, which will then reflect the new share class and the rights which go with that share class.
Some companies may find it useful to have more than one share class, but for the most part, smaller companies do not need to worry about them. Just be aware that if needed your company can adopt them. However, you should use caution and always seek professional advice.