Changing of class of shares means transformation of shares from one share class to another class. Different shares are issued by companies on the basis of objective of the founder or circumstances. Many businesses start issuing shares at the time of incorporation when they have more than one shareholder and even change their share classes at the later stage.
- Change of class of shares
- Types of shares
- Reasons for changing class of shares
- Conditions to be allowed to multiple classes of shares
- Process of changing class of shares
Change of class of shares
Sometimes, it becomes necessary for a company to change the class of shares by converting some or all of an existing share class to another share class. The new share class can be an existing share class or a completely new share class. Change of share class can be done for variety of reasons which we will discuss later in the blog. Most of the companies deal in one class of shares i.e. ordinary shares but you will find multiple share classes increasingly common in the small private companies. There are various classes of shares and details about the rights attached to them, set out in company’s articles of association (AOA).
Example – Suppose you are having following shares with you -
20000 £1 ‘A’ Ordinary shares
15000 £1 ‘B’ Ordinary shares
18000 £1 Ordinary shares
In this example, we have to convert 20000 ‘A’ ordinary shares and 15000 ‘B’ ordinary shares into ordinary shares in order to take the final total to 53000 ordinary shares.
In order to achieve this, you firstly need to convert class ‘A’ ordinary shares to ordinary shares and then the same procedure to be followed for ‘B’ ordinary shares too.
Types of shares
There are different types of shares issued by the companies, most commonly ordinary shares that are issued at the time of incorporation – Entitlement of one voting right per share, equal rights of dividend per share, participation in the distribution arising from the event of winding up of the company. Apart from ordinary shares, there are different types of share classes representing different types of shares which you can study in detail here.
Reasons for changing class of sharesThere might be various reasons for changing the class of shares, few of them are –
- Opportunity to change the way of managing finances & decisions of the company.
- Alteration to voting rights among employees.
- Dividend & capital distribution.
By changing the class of shares, it may become possible for you to –
- Bring investors to your Company’s doorstep.
- Do taxation planning.
- Maintain control over the company.
- Enhance estate planning.
- Benefit people in the form of dividend without giving control.
- Issue shares to employees or family members etc.
One of the most important reasons for changing class of shares is tax planning. Declaration of different rates of dividend to different shareholders can financially benefit your company. Suppose there are shareholders who are employees and pays income tax and others one who are not into work, different dividends should be applied to each of them that can help in optimisation of personal tax allowances too.
Changing of Company’s share structure may also consider as one of the valid motives of changing class of shares. If over complicating of matters is one of the reason for creation of various share types, the situation may become difficult for you in handling other areas too –
- It becomes harder for you to manage general meetings.
- More tricky to raise new capital from investors etc.
Conditions to be allowed to multiple classes of sharesThere are certain conditions that a company must follow before allotting additional classes of shares –
- There should be clear specification of classes of shares that the directors can allot, rights of the shares and the process of changing the share rights in future.
- In case the above details are not specified in the Articles of association, new set of articles should be adopted for which special resolution need to be passed (75% of shareholders should agree to the decision)
- It is also important to notify Companies house about variation of rights attached to shares by filing SH10 form.
- The company directors should be expressly permitted for issuance of multiple classes of shares as mentioned in the Articles of Association. If Articles of association does not permit or provide permission for the same, a further ordinary resolution has been passed by the shareholders of the company (50% of shareholders must agree to the decision)
Also See: Tax advantaged employee share schemes
Process of changing class of shares
The process of changing class of shares is somewhat different from the creation of new classes and the same is explained below –
- It is mandatory for the members of the company to pass an ordinary resolution in order to convert one class of shares to another along with the following details –
- Name of the shareholder and the number of shares for which the class has been changed.
- Specify the previous class of shares.
- Specify the new/changed class of shares.
- After the approval to the resolution, the company needs to submit Form SH08 to notify Companies house about the change of class of shares.
- After notifying the change of class of shares to Companies house, new share certificates are created and issued to the relevant shareholders mentioning the changed class of share.
In case you want more information or advice on changing of class of shares, kindly call us on 03330886686 or you can also e-mail us at email@example.com
Also See: Entrepreneurs Relief When Selling Shares
Also See: Issuing of Share Certificate
Also See: Limited Company Formation