In a company, there may be two initial shareholders both holding 15 ordinary shares. A new shareholder is introduced to the company and is transferred 5 shares from each of the initial shareholders. As a result, each of the, now, three shareholders has the same rights in the Company, such as voting rights and the right to receive a dividend.
A potential issue with this is that although the directors of the company have authorised the introduction of a new shareholder, they may not want them to have the same rights attaching to his shares. A common example of this is a director that is also a shareholder may not want the new shareholder to have voting rights in the company.
To overcome this issue, the company may decide to change how their share capital is structured by creating multiple classes of shares. This could be structured so that all shareholders holding ‘ordinary A shares’ have all rights attached to their shares and those holding ‘ordinary B shares’ only have the right to receive dividends but not to vote.
Changing the rights which attach to shares can be more complex than many companies originally anticipate. Usually identified as a reclassification or redesignation of shares, the process requires a restructuring of the company’s share capital.
The Companies Act 2006 (“the Act”) provides little legislative guidance on the designation of shares other than in what circumstances the rights may be changed and that notice is to be provided to the Registrar of Companies House.
A common mistake made, is believing that only an SH08 form to notify of the change is required. However, in order to reclassify shares in a company and comply with s.630 of the Act, it is primarily fundamental to adopt articles of association to permit this. To protect the company and its shareholders, this may only be done if a special resolution is passed, meaning that 75% of shareholders must agree to it. The resolution and articles then need to be filed at Companies House, along with any necessary forms, within 15 days of the amendment taking effect in accordance with s.26 of the Act.
Not all reclassifications of shares involve a variation of rights, however, there may be other documents such as board minutes, further resolutions and further Companies House forms.
Tax advice and legal assistance should always be sought when considering restructuring a company’s share capital.
The Business law team at Edward Hands & Lewis can advise and prepare the necessary documentation to redesignate the shares of a company. For more information, please contact a member of the team.
If you would like to talk to a member of the business law team in Leicester please do not hesitate to call 0116 266 5394.Talk to our legal team
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