What are share classes?
Share classes refer to the different types of shares that can issued by the company. They may have different rights and privileges attached to them, which are often defined in the company’s Articles of Association or a Shareholders Agreement.
The most common type of shares issued by a company are Ordinary Shares. Holders of Ordinary Shares usually have various rights attached to them. The main ones are voting rights, the right to receive dividends, and the right to share in the company’s assets if it is wound up or sold.
It is possible for other shares to be issued which are given other names such as Preference Shares, Redeemable Shares, Deferred Shares etc. however these are less common.
Voting Rights
Shares will usually carry voting rights, which enable the shareholder to vote on resolutions, elect directors, and make decision on matters like mergers or acquisitions. It is possible to give shareholders weighted voting rights on certain decisions meaning their vote carries more of a weight. It is also possible for shareholders to hold shares which have no voting rights attached at all.
Dividend Rights
Shareholders are entitled to dividends on a class of shares if the company declares them on that class of share. If a dividend is declared on a class of shares, all shareholders who hold that type of share must be paid the same amount. A company may have a dividend policy, outlined in a Shareholders Agreement or the articles, which outlines how dividends are declare and distributed and whether some shares rank above others.
Rights to capital
In the event of the company being wound up, the shareholders have a right to share in the remaining assets after all debts and liabilities are paid. If a shareholders’ share rights entitle them to a share of capital, their entitlement will be proportionate to their shareholding percentage. Shareholders entitled to capital will be paid last though after the creditors have been paid off. Therefore, in reality, there may not actually be anything less to distribute.
If the company is sold to a third party however, shareholders entitled to capital will take a percentage of the purchase price.
Conclusion
The structure and rights attached to share classes in a company provide flexibility in how the company raises capital and distributes control among shareholders. These rights can significantly affect the financial and decision-making power of shareholders, so it’s crucial for any company to carefully consider the classes of shares issued and their associated rights during formation or at any stage of capital restructuring.
If you are dealing with specific situations regarding share classes or rights, it’s often advisable to seek legal advice to ensure the Articles of Association accurately reflect the desired governance structure.
Contact the author
This article was written by Kingsley James, Solicitor in our Corporate and Commercial department. If you wish to discuss anything mentioned above, contact Kingsley below.