Share Capital and Restructuring

Redesignation of Shares

With our share redesignation service, we can convert the existing Ordinary shares in a company into multiple classes of share, or create additional new classes of share. Having multiple share classes is useful for where you need to vary the rights that each shareholder receives.

The most common alteration we are requested to make is the creation of Alphabet shares – this is where each class of share is designated by a different letter of the alphabet, e.g. “A” Ordinary Shares, “B” Ordinary Shares etc.

We can also create specific types of share class, such as Employee Shares, Preference Shares and Redeemable Shares.

When reclassifying shares, the main rights available for variation are:

Dividend

We can introduce a “variable dividend” clause into your articles which allows the directors to propose different levels of dividend for each class of share in existence.

You can also restrict dividends for a share class, or define a fixed dividend. You can also set different levels of “preference” for different share classes, so that one class of share receives a dividend before another.

You can also set a fixed dividend to be cumulative, so that if insufficient funds are available to declare a dividend, then the dividend right accumulates until such time there are enough distributable reserves to make the payment.

Voting

You can restrict the voting rights attached to a class of share, or introduce weighted voting, so that the votes of one class of share are more important than another. You can also provide that a class of share may receive additional voting rights in the event of a specified occurrence.

Capital Participation

If the company is wound up with surplus assets then these assets are distributed to the shareholders. You can restrict the extent to which a class of share can participate in this event, or in any other return of capital.

Redemption

A company may issue shares that it may purchase back at a future time. This could be at either the option of the company or the shareholder, or could be conditional on a specific event occurring. Redeemable shares must be issued as redeemable and cannot be converted from non-redeemable to redeemable shares.

Conversion

Convertible shares are shares that can change from one class to another at some point in the future based on a set of conditions in the Articles. An example of when this might be used could be Preference Shares that automatically convert into Ordinary shares if their Preference Dividend is not paid after a specified amount of time.

Employee Shares

Employee shares are shares that you issue to an employee of the company as a form of incentivisation. By issuing shares to an employee, they will get to share in the company’s success so may be more focused on achieving that success.

Employee shares are usually tied to the employee’s employment with the company, and the employee will often be forced to relinquish their shares if they leave for any reason. This will usually be achieved by redemption, or by a Compulsory Transfer clause in the Articles of Association.

When an employee is forced to relinquish their shares, you may opt to include a Good/Bad Leaver clause in the articles. This allows the Company to change the amount the departing employee is paid for their shares depending on the circumstances of their departure. E.g. if they have retired after a long service then they may be paid a fair market price for their shares, but if they are let go following gross misconduct then the purchase price may be restricted to nominal value.

You may also want to consider including Drag/Tag along clauses in the Articles when creating Employee shares if there is the possibility the owners may want to sell the company in the future. A Drag Along clause allows the majority shareholder(s) to force the minority shareholder(s) to sell their shares upon the sale of the company, while a Tag Along clause allows the minority shareholders to voluntarily add their shares to the sale, even if not requested to.

Preference Shares

Preference Shares are a class of share that receive some form of preferential right over the other classes of share in issue. This will most frequently be a preferential right to dividend and/or a preferential right to a return of capital upon a winding up or other capital distribution.

The dividend on a preference share will usually be fixed, either at zero, or at a small percentage of the share’s nominal value, e.g. 5%. A Preference Dividend will need to be declared before any other dividend on any other share class can be proposed. A Preference share dividend can be drafted as a cumulative dividend, so that if there are insufficient reserves to pay in one period, the obligation to pay that dividend remains and accumulates until such time the Company is in a position to pay it.

A preferential return of capital ensures that the preference shareholder is first in line, after the company’s creditors, to get their capital back if the company is wound up. This is important if there may not be sufficient surplus assets to repay all shareholders.

Preference shares will not usually be voting, but they can be if this is desired. It is not unusual for a preference share to carry conditional voting, allowing them to vote if their dividend goes unpaid.

Preference Shares are also more likely than other classes to be redeemable and/or convertible.

Suzanne Alves

Contact Suzanne Alves for more information about this service

0207 554 2261

Subdivision/Consolidation of Shares

A subdivision or a consolidation allows you to change the number of shares in issue and the nominal value per share, whilst keeping the total value of the share capital the same.

You can subdivide shares of one value into multiple shares of a smaller value, or consolidate shares of one value into a smaller number of shares of a higher value. E.g. you could subdivide 1 share of £1 into 100 shares of 1p, or consolidate 1,000 shares of 10p in to 100 shares of £1.

Subdivision is useful to make the shares in a company more easily tradeable by reducing the value of each share. It also allows the transfer of smaller percentages of the share capital.

By way of example, a standard share capital upon formation is 100 Ordinary shares of £1 each. If such a company were to go on to be successful and was subsequently valued at £5m, then each share in the company would be worth £50,000. Such a high value share would not be easily tradeable, but by subdividing the 100 Ordinary shares of £1 into 1,000,000 Ordinary shares of £0.0001, then the market value of each share becomes £5, which is much more manageable. Additionally, if an investor wished to acquire 12.5% of the share capital, then with 100 shares in issue, this would not be possible, as you cannot hold fractions of a share. But with 1,000,000 shares then achieving a 12.5% holding is straightforward.

Consolidation is used more to simplify the share capital when such high numbers of shares are no longer necessary. For example, if a company with multiple small shareholders was acquired in its entirety by a larger company, then the new holding company may deem that 1,000,000 Ordinary shares of £0.0001 are not required, and consolidate the shares into 100 Ordinary shares of £1 each to simplify the company administration.

Suzanne Alves

Contact Suzanne Alves for more information about this service

0207 554 2261