By Matthew Ray, Associate Solicitor at Swinburne Maddison LLP
For private companies with only one class of shares (normally designated as ordinary shares), its shareholders are entitled to participate in voting, dividends, and capital distributions in accordance with the proportion in which they hold the issued share capital of the company.
This standard share structure is not always the most suitable as it offers no flexibility to vary the rights of the shareholders to vote, receive dividends or participate in capital distributions. This flexibility might be desirable in owner-managed businesses where some shareholders are more involved in the management of the business than others or to facilitate tax and succession planning or the introduction of tax-advantaged share option schemes, all of which are becoming increasingly popular in today’s market.
For this reason, it is becoming common for companies to implement a more bespoke share structure either on or after incorporation where its share capital is divided into separate classes of shares, each of which have a different name and different rights and restrictions.
This is often referred to as an ‘alphabet share structure’ and provides flexibility so the rights and restrictions of each shareholder can be tailored to the individual circumstances of the company or to facilitate specialist tax and succession planning.
Alphabet share structures: the importance of careful planning and implementation
Whilst the option of an ‘alphabet share structure’ is well known, it is often implemented incorrectly and fundamental errors can be discovered many years later when the shareholders wish to dispose of their shares or undertake further tax-driven planning.
Examples of the common mistakes are:
a) the directors of the company not having authority under the Companies Act 2006 to issue and allot new shares of a different class in the capital of the company;
b) the failure to disapply or follow certain pre-emptive rights in connection with the allotment and issue of new shares in the capital of the company;
c) the rights attaching to the separate class of shares not being clearly documented in a document that is legally binding on the company and its shareholders;
d) not clearly distinguishing each class from the others so that the only material difference is the designated name; and
e) the failure to comply with statutory requirements under the Companies Act 2006 as to post-completion filings with the Registrar of Companies and updating the statutory registers of the company.
Despite being seen as a relatively straightforward concept, falling foul of these common mistakes can result in unexpected delays, fines, tax charges and legal costs when rectification becomes necessary.
If you are considering implementing an ‘alphabet share scheme’, it is necessary to take specialist legal and tax advice to ensure that the strict requirements are met, and the company has a clear and certain share structure.
For further information on the restructuring of share capital or if you require advice on any other corporate related matter, please contact Matthew Ray at mjr@swinburnemaddison.co.uk or by telephone on 0191 384 2441