How to create a new share class

It is quite straightforward to create a new share class so that a company has multiple share classes in existence.  A company can either create a new share class in addition to an existing class or split an existing share class into one or more new share classes.  Here we set out what steps to take when creating a wholly new share class, and also provide a number of free templates you can adapt and use.

Contrary to popular belief, the rights of a new share class do not have to be different from existing share classes.

While the company may create another Ordinary share class, there are various types of share that a company may wish to create and use. The exact rights that apply, which are defined in the prescribed particulars for the new share class, can be whatever the shareholders agree and can cover much more than just voting and dividend entitlement. Contrary to popular belief, the rights of a new share class do not have to be different from existing share classes.

Multiple share classes are often used to enable dividends to be paid at different rates to holders of certain classes of share. Other shares, known as preference shares, may have a fixed rate of dividend paid upon them before dividends are paid on other share classes.  The holders of the ordinary shares would then share any remaining sums available for distribution after the preference shareholders have been paid.  These are often used when an investor wishes to introduce funding for a fixed return, similar in character to making a loan.

While many of the steps set out below apply to all companies, they are specifically aimed at private companies limited by shares with only one existing class of shares prior to creating the new class.  The other assumptions are that the Company was incorporated under the Companies Act 2006 (i.e. on or after 1st October 2009) and that everyone is going to support the change.  Whether the below steps apply to any particular company will need to be determined on a case-by-case basis. For instance, if the company was incorporated before 1st October 2009 then there are some additional considerations. If you are at all unsure about any of the below steps or the possible tax consequences then it is always best to take professional advice.

We start examining the process of creating a new share class by looking at some preliminary considerations.

If the company was formed with the model articles then section 22(1) reads:

Subject to the articles, but without prejudice to the rights attached to any existing share, the company may issue shares with such rights or restrictions as may be determined by ordinary resolution.

So, the model articles do allow the creation of a new share class.  However, once the new class has been created, the articles of association themselves will need to be amended to reflect this.

Having created a new share class the directors will typically want to allot some.   For private companies with only one class of share the directors do not need an express authority from the shareholders before they may allot new shares.  They can simply allot new shares, subject to the Companies Act and the articles of association.

Always check to see if there is a shareholders’ agreement in place or whether there are any minority shareholders who might object. If there is a shareholders’ agreement make sure any provisions therein are observed.  If there is a minority shareholder who may object to the creation of the new share class then proceed with caution.  There are some very detailed requirements that must be adhered to and it may be wise to take professional advice.  Also note that existing shareholders have a statutory right of pre-emption when it comes to the issue of new shares.

It is all very well creating lots of new share classes all with a variety of different rights and entitlements but if the end result is incomprehensible then it will make it harder to manage general meetings, attract new capital etc.

Assuming none of the preliminary considerations are an obstacle then the rest is very straightforward:

With only a few shareholders it is easiest to organise this as a written resolution – one that a sufficient number of  the shareholders sign to achieve the necessary majority. We’ve produced a specimen shareholder resolution to approve the creation and allotment of the new shares and deal with the necessary revision to the articles.

If the number of existing shareholders make it unwieldy to pass a written resolution with the signature of shareholders, a resolution will instead need to be proposed and passed as part of a meeting of shareholders.

The amended articles will reflect the new shares created, including the new rights these share have. Elsewhere, we cover in detail what’s required when changing the articles of association. You should also consider sending a copy of the new articles to the company’s auditors and bankers together with all the existing shareholders.

While we cover the share allotment process in much more detail elsewhere, in brief it will typically entail:

1. Preparing a form or template letter of application for subscribers
2. The subscribers return the completed form with payment
3. Hold a board meeting to approve the applications for new shares via board resolution, and produce a minute of the meeting
4. Issue share certificates
5. Complete a return of allotment via Companies House form SH01
6. Update the company’s statutory books, specifically the register of members and, if the company maintains one, the register of allotments

Once the new share class is in place, then provided that the directors still have authority from the shareholders, more shares can be issued subject to any restrictions written into the articles of association or any shareholders’ agreement. Likewise, the holders of shares will also be able to transfer their new shares to a third party, subject to any pre-emption rights.