While some limited companies only have a single class of ordinary shares, others, for a variety of reasons, issue different classes of shares. For example, you may not want certain shareholders to have voting rights on company matters for example. Or, you may want to give certain groups of shareholders enhanced rights to dividends. You can achieve this by issuing shares of different classes.
A company owner whose company has different share classes may sometimes want to convert shares of one class into another class of shares, Class A shares to Class B, for example. In this article we explore the reasons a business may want to do this, and the consequences for shareholders and the company.
Contents:
What is share reclassification
Share reclassification is where a company limited by shares converts its shares from one class to another. There are a variety of reasons why a business owner may wish to do this, and these are similar to the reasons you created different share classes in the first place – you want your company to issue employee shares, you’re seeking new investors, you want to rejig your shareholders’ rights to dividends etc.
Why is reclassification important and whom does it benefit?
Ordinary shares of a company come with certain fundamental rights, for example, a right to receive dividends, the right to receive the initial investment back when the company is liquidated, and the right to vote on company matters. These rights are shared equally among the shareholders in proportion to their percentage share ownership.
Where a company wants to vary these rights among different groups of shareholders it does so by creating new share classes, often called Class A, Class B and so on. For example, it may want to incentivise employees by offering them shares, but not allow them the right to vote. Or, it may want to allow investors the right to receive fixed dividends on their shares in preference over other shareholders as a means to attract further investment.
Share reclassification is important as it allows a business owner to adjust the rights of different shareholders so that the company benefits. It may allow you to issue additional shares to raise finance yet maintain full control of company decision-making, for example. It may permit you to offer shares in the company to new or existing employees as an incentive to help the company grow.
Another reason that shares may be redesignated is in connection with tax planning. By offering shareholders with different tax statuses different types of shares, you can maximise the allowances available so that the tax structure is more efficient for investors.
What’s the process for reclassifying shares?
Before you reclassify shares, you need to make sure that your company’s Articles of Association permit different classes of shares, specify the rights of each class and set out how these can be changed in the future.
If your existing Articles don’t provide for different share classes, you’ll need to change them by passing a special resolution of shareholders (a special resolution needs to be passed by at least 75% of the shareholders) so that they do.
Once your Articles have been amended, the directors can issue new classes of shares. You need to be sure the Articles allow the directors to issue shares – if they don’t, then the shareholders can pass an ordinary resolution (needing 50% agreement) to allow the directors to issue shares.
To redesignate the shares, the company shareholders will pass an ordinary resolution that identifies:
- The shareholder whose shares will be redesignated, and how many shares will be redesignated
- What share class the shares were originally
- The class to which they are being redesignated
Once this has been done, you will notify Companies House, change the register of members and issue new share certificates.
Example of a simple reclassification
Anne and Matt co-own a company, holding 100 ordinary shares between them, 50/50. Matt is stepping down from the running of the business, but would still like to receive dividends. Anne is happy for Matt to continue to participate in the company’s profits but doesn’t want him having any control over company strategy. The company’s Articles permit different share classes, with Class A shareholders having the right to receive dividends but not vote on company matters.
Anne and Matt pass an ordinary resolution to redesignate Matt’s 50 ordinary shares as Class A shares, and Matt’s ordinary share certificate is replaced with a certificate for Class A shares.
How does reclassification affect tax?
As we’ve seen, it may sometimes be more advantageous to an individual shareholder to receive income from a company in the form of dividends rather than a salary, in terms of the amount of tax they pay, and their liability for National Insurance contributions. In terms of the company’s tax status, dividends are paid after corporation tax has been calculated, so paying dividends at preferential rates won’t affect its tax position.
Sub-dividing and consolidation shares
Sometimes a business owner will want to consolidate or sub-divide their company’s shares. You do this by changing the number of issued shares and their nominal value, even though the overall amount of share capital stays the same. So, in effect, you end up with shares with a higher nominal value when you consolidate them, and more shares with a lower nominal value when you subdivide.
Share certificates and register of members
As we’ve seen, if you redesignate shares then you’ll need to update the register of members to reflect the new share classes and their owners, and also issue new share certificates that reflect the current shareholders and the classes of shares they own. For more information on share reclassification and share classes generally, get in touch on 0800 689 1700 email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
