What is a Shareholders Agreement? And Why do They Matter?
Shareholders' agreements are key to shielding companies and shareholders alike from risk. But why do they matter so much? And what should they include?Learn More
November 1, 2019
When you incorporated your start-up at Companies House, chances are that you gave lots of thought to its name, the directors, and the original shareholders. However, you may not have done too much thinking about the number/types of shares issued to allow for future structural changes, or additional shareholders you may wish to bring on board.
You will already know the basics - that shares generally entitle the holder of them to vote and to receive a share in the profits in a company in proportion to the size of their shareholding. So, what else is useful to know about how they work, and what can you do to make them work in the best way for your company structure and future plans?
Before we get started, it helps to revise the basics of shares. Below you'll find a handy infographic that breaks down some of the key components of shares...
The nominal value is the ‘face value’ of a share (the difference between the amount paid for a share and its nominal value is known as the ‘share premium’). You decide the nominal value of shares, which is typically £1 but can be one hundredth of a penny (£0.0001) and sometimes lower. For future allocations it’s worth bearing in mind that you cannot issue partial shares - you will always need whole numbers. As a result, it may be better to have a larger number of lower nominal value shares to enable an easier division of shares in varying proportions between your shareholders.
Assuming that the company’s articles don’t restrict or exclude your ability to do so, it is possible to sub-divide your company’s existing share capital to increase the number of shares or consolidate shares so that there are fewer shares. Either of these processes just needs to be approved by a shareholders’ resolution. There will be administrative boxes to tick as well – making sure that you have documented any changes to the share capital in the company’s books and filing the necessary forms at Companies House.
A company’s share capital can be made up of different classes of shares. Most companies will have ‘ordinary’ shares which typically carry one vote per share, and with each share giving equal right to dividends.
There are also ‘preference’ shares and ‘deferred’ shares. The clue is in the name for both of these classes: preference shares will mean that the holder of them will rank ahead of ‘ordinary’ shareholders in relation to dividends or capital (but they may carry limited voting rights), and deferred shares have no right to dividends either for a set period of time, or until a certain set of conditions are met.
It may be that you want the ability to declare different dividends to individual shareholders (perhaps based on their input into the success of the company): step forward the alphabet share. Each shareholder can have their own allocated alphabet shares in addition to holding ordinary shares (these may be known as ‘Ordinary A Shares’, ‘Ordinary B Shares’ etc). You may then choose to declare a dividend to an Ordinary A shareholder, but not to an Ordinary B shareholder or vice versa, or differing dividends to each. However, there may be tax implications associated with this kind of structure which you should explore with your accountants.
You should also bear in mind that any future investors are likely to request their own class of share with specific rights attached to them as a condition of their investment.
New shares are created by ‘allotting’ or ‘issuing’ them.
Where a company only has one class of shares, directors are free to allot as many shares as they want unless the company’s constitutional document, its ‘articles of association’ say otherwise.
Where a company has more than one class of shares, the directors will need authority in order to allot new shares and existing shareholders will have a right of pre-emption (meaning that they will be offered first refusal on buying, or ‘subscribing for’ the new shares). Pre-emption rights can be excluded, disapplied or waived, so they should not cause any unnecessary problems, and serve as a useful protection to existing shareholders so that they can take steps to ensure that their shareholding in the company is not diluted.
Stephenson Law works with companies from their inception and incorporation, through securing investment, to the ultimate sale of the business, and can support you in all the decisions and hurdles along the way. We’re experienced in drafting all the paperwork needed to make changes to your company’s share structure, so that you can get on with the important job of running it!
If you would like to discuss any of this with us, please contact us.
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