For anyone dipping their toes into corporate ownership, one term you will hear early and often is "share classes." But what are they exactly? And why do they matter?
At its simplest, different classes of shares exist to give companies flexibility in how ownership, control and economic benefit are distributed. Whether you are advising a founder, negotiating investment terms or cleaning up a messy cap table, a solid grasp of the basics will go a long way.
Here is your 101 on the main types of share classes in UK companies. They are more than just letters of the alphabet.
Ordinary shares: the default setting
Most UK companies issue ordinary shares. These typically carry
- the right to vote on shareholder matters
- the right to pidends
- the right to capital on a winding up
Unless a company's articles or shareholders' agreement state otherwise, all ordinary shares rank equally. However, companies can create different sub-classes of ordinary shares, commonly known as alphabet shares (A shares, B shares and so on), to give shareholders varying rights, such as different pidend entitlements or control provisions.
Preference shares: first in line
Preference shares are typically issued to investors who want greater protection or guaranteed returns. These shares often
- carry a fixed pidend, which may accrue if unpaid
- rank ahead of ordinary shares on distributions and on a winding up
- may or may not have voting rights, although often they do not
They can be cumulative, meaning missed pidends roll over, or non-cumulative, meaning missed payments are lost. The terms of preference shares are usually negotiated and set out in bespoke articles or investment agreements.
Redeemable shares: a built-in exit strategy
A company may issue redeemable shares, which give it the right or obligation to buy the shares back at a future date or on specific terms. These are commonly used in
- venture capital or private equity transactions
- employee share buyback arrangements
- capital reduction strategies
The key point is that redeemable shares allow the company to tidy up its shareholding at a later stage without relying on a third-party sale.
Non-voting shares: economic benefit without control
As the name suggests, non-voting shares offer shareholders rights to pidends and capital but no say in how the company is run. They are often used to
- incentivise employees without diluting control
- bring in passive investors
- facilitate family ownership structures
Bear in mind that "non-voting" may still carry some minimal rights, such as the ability to vote on matters affecting that class directly.
Custom share classes: tailored to fit
One of the strengths of the UK corporate system is its flexibility. Companies can create bespoke share classes with tailored combinations of rights. This can include
- enhanced voting rights, such as ten votes per share
- veto rights on key decisions
- anti-dilution protections
- pidend preference plus participation
These arrangements must be properly reflected in the articles of association, and ideally in a shareholders' agreement, to avoid future disputes.
Why use different classes?
The reasons vary, but the goal is usually balance between control, reward and flexibility. A few scenarios where share classes play a key role include:
- Start-ups: Founders might keep 'A' shares with full voting rights while giving early employees 'B' shares with limited rights and pidend access.
- Investments: Preference shares are often used in funding rounds to protect investors' returns.
- Succession planning: Non-voting or alphabet shares can help pass on value to family members without losing control of the business.
- Exit strategy: Redeemable shares offer clean exit options for short-term investors.
What to look out for as a lawyer
Share classes might seem simple, until they are not. A few things to keep on your radar:
- The articles and any shareholders' agreement take priority. Always check what they say about rights and restrictions.
- Tax implications can vary. HMRC may scrutinise different classes, especially if they impact valuation or CGT on exit.
- Classes can be customised, but not casually. Creating or altering share classes requires proper authorisation, documentation and often special resolutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
