Why do some companies have different classes of shares ?

Many Companies have different classes of shares. There are a number of different reasons why the shareholders of a company would chose to structure the company in this way. One of the most common reasons for having different classes of shares or preference shares is when a party wishes to invest in the company. By

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Many Companies have different classes of shares. There are a number of different reasons why the shareholders of a company would chose to structure the company in this way.

One of the most common reasons for having different classes of shares or preference shares is when a party wishes to invest in the company. By issuing the investor / new shareholder with a different class of shares the shareholders can agree together what rights each shareholder should and should not have (within the realms of the law).

You can have as many classes of shares as you require each with different rights. For example one class of shares could have the right to receive a preferential dividend (which would allow them to be paid out before any other shareholder) or to be paid a higher dividend than the other shareholders.

If a party is investing in a company but has little to do with its day to day management the original shareholders may not want the new shareholder to have any voting rights so they could be issued with a class of shares that allows them to collect a dividend but does not allow them to vote at any meeting of the company.

If the investment in the company is to be repaid within a certain period you could be issued with shares that will convert once a certain amount of money has been repaid or a level of dividend received etc the share could convert into a share that has no right to receive a dividend nor to vote.

There are numerous options when it comes to different classes of shares and preference shares and before a decision is taken on how to structure a company it is best to sit down and consider exactly what each shareholder wants and what they are entitled too.

As well as structuring the company with different classes of shares the share rights will be included in the articles of association but often companies with different classes of shares such as this also chose to have a shareholders agreement in place which is essentially a blue print of how the company is going to be run on a day to day basis and the rights of all of the shareholders, in particular minority shareholders are generally dealt with in the shareholders agreement.

Another common scenario where shareholders seek to have different classes of shares is with family businesses. Often when the reigns of running the company are passed to the next generation the original owners want to retain some interest in the company, whether financial or to assist with their knowledge and expertise. Again in such a scenario it is important for the family members to be clear what their respective roles will be within the company. The new class of shares could have dividend rights but no voting rights or vice versa there are as above many options and it is best to be very clear of what you require before introducing a new class.

It may also be sensible to consider amending the articles of association to set out how shares are to be held and whether they can be transferred to parties outside of the family and whether pre-emption rights will be included etc.

Different classes of shares are very useful tools for ensuring that the structure of the company suits each of its shareholders and allows the smooth running of the company.

dserota-sbContact me for further advice or visit our company law pages on the site.

commercial law • Debbie Serota

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