A guide to alphabet share classes

Three wooden blocks with A, B, C displayed on them against a light blue background, representing the the alphabet shares concept.

Alphabet share classes are probably the most common multiple share class type used in the UK. They allow companies to provide different shareholders with different rights, quickly and easily.

Their simplicity makes them the first choice for companies of all backgrounds – from small family-run companies looking to give shares to their children, to joint ventures being set up by multiple businesses.

This guide explains what multiple share classes are, what alphabet shares are, how alphabet shares work, and why companies choose to use them. We’ll also walk you through some of the other types of classes companies may opt for when deciding how their share capital is structured.

What are multiple share classes?

Normally, a share represents a proportional percentage of a company. The number of shares a person owns dictates how much control or voting power they have, the proportion of profit they are entitled to, and the limit of their financial liability to the company.

When you incorporate a company in the UK, you’re required to issue at least one share, but normally you are free to issue as many shares as you like.

You can also issue different types of shares, rather than just simple ordinary shares. With these different share classes, you can then assign different rights to the holders of them.

Beyond simple ordinary shares, you can issue non-voting shares, alphabet shares, redeemable shares, preference shares, growth shares, and more. We’ll cover some of these other share types – but for now, let’s focus on alphabet shares.

What are alphabet shares?

Alphabet shares are without doubt the most common type of share that companies issue when they pursue a multiple share class strategy. They essentially divide company ownership between multiple types of ordinary shares, with slightly different rights attached to each class.

They’re typically assigned alphabetically and named accordingly – which is where the term ‘alphabet shares’ comes from. For example, a company with three alphabet share classes might call them ‘A’ Ordinary, ‘B’ Ordinary, and ‘C’ Ordinary. There is, however, no strict requirement that alphabet share classes be named in this sequential manner.

The rights of each share class can then be altered, either limiting or increasing their rights. These alterations typically concern:

  • Entitlement to dividends
  • Entitlement to vote
  • Entitlement to capital

Let’s take a look at how rights to these three entitlements might be varied.

Dividend rights

Normally, when a company has only one share class, each shareholder is entitled to participate in any dividends declared, in proportion to the number of shares they hold. So, if you held 20% of all shares in a company and a total dividend of £1,000 was declared, you would be entitled to receive £200. It would not be possible under a single share class structure for you to hold 20% of the company and receive more (or less) than 20% of that dividend.

That is unless you structure the company’s shares with alphabet share classes, and allow for different dividend rates to be paid on each class in turn (often known simply as ‘variable dividends’).

If those 20% of shares were in a separate share class on their own, and that class was entitled to variable rates of dividends vis-à-vis the other class(es), then the company could now give the holder of those 20% of shares a higher (or lower) level of dividend. You would therefore not be capped at receiving just 20% of the total dividends declared – rather, the actual proportion could be whatever level the directors set.

Alternatively, under an alphabet share class structure, you may decide that certain share classes are not allowed to participate in any dividend payments altogether. So, in a two-share class company where one share class is not entitled to receive dividends, any dividends that are declared are given entirely to the holders of the other class.

Voting rights

Normally, each share has one vote attached to it. So, if a shareholder resolution needs to be voted on (either at a general meeting or as a written resolution), the number of votes you have would simply depend on the number of shares you hold.

With alphabet share classes, however, you can change this, so that not every shareholder vote is equal. You could ‘enhance’ the voting rights of certain classes, or remove the voting rights of other classes altogether.

Take, for example, a company with two shareholders – one holding 50 ‘A’ Ordinary shares and the other holding 50 ‘B’ Ordinary shares. If the voting rights remain equal (in other words, each share has one vote), then both shareholders have the same amount of votes.

However, if you gave the ‘B’ Ordinary shares enhanced voting rights, this situation would change. For example, should the ‘A’ Ordinary shares continue to have only 1 vote per share, but the ‘B’ Ordinary shares are given 4 votes for each ‘B’ Ordinary share, then the holder of the ‘B’ Ordinary shares from our earlier example would now hold 80% of the total voting rights in the company, despite only holding 50% of the shares.

Capital rights

Capital rights refer to the shareholder’s participation in any capital distributions that take place (such as on a winding up of the company). Usually, if a company is being wound up, then the holder of a share is entitled to receive back the amount they paid to the company (if any) for that share, as well as any surplus assets left over in the company (given to them in proportion to their holding).

With alphabet shares, this can again be modified. You could set only certain classes to be entitled to receive any surplus assets in the company. For example, if there are two classes in a company (‘A’ Ordinary and ‘B’ Ordinary), you could set only the ‘A’ Ordinary shares to receive surplus assets on a capital distribution. So, if the company was wound up (on the presumption that the company has no outstanding liabilities), both the ‘A’ Ordinary shares and the ‘B’ Ordinary shares would first receive back what they paid up for the shares.

However, only the holders of the ‘A’ Ordinary shares would be entitled thereafter to receive any surplus assets left in the company (and if there are any, then these are distributed to the holders of the ‘A’ Ordinary shares in proportion to their holding).

Why might a company issue alphabet shares?

Simply put, UK companies issue alphabet shares to give shares to individuals or corporate entities with different rights and privileges.

Exactly what those rights and privileges are would normally depend on who you’re giving the shares to and why. We’ve laid out below some of the common reasons for deploying the use of alphabet share classes.

Issuing company shares to family members

You might want to give shares to your partner or children, so that they’re able to receive dividends from your company. This is a common strategy for parents wanting to build generational wealth or develop a stream of passive income for their loved ones (for example, to save up for university). But that doesn’t mean you want everyone in your family to have voting rights on big company decisions.

That’s where alphabet shares can be beneficial. They’re able to give family members or other loved ones access to company profits, without giving them a say in decisions about the company.

Awarding shares to employees

Companies will often issue multiple classes of alphabet shares to create and operate employee share schemes.

These schemes can be a fantastic way to attract and retain top talent, allowing employees to participate in the success of the company (such as through the receipt of dividends), but again, without the need to give away voting control.

Facilitating joint ventures

Joint ventures are another common motivation behind the creation of alphabet shares.

When two or more companies decide to embark on a joint venture, they’ll often create a separate jointly owned company. This jointly owned company will then normally have multiple share classes, so as to vary the control and define ownership rights for each party.

For example, let’s say two companies (Company A and Company B) decide to form a new limited company together to manage a big project. However, Company A is funding 75% of the joint venture, whilst ‘Company B’ is only putting up 25% of the funding.

The businesses may subsequently agree to issue alphabet shares in the new company, entitling each company to different levels of dividend and/or capital distribution, to help better reward their respective levels of investment.

How to introduce alphabet share classes

If you’re keen on issuing alphabet shares, there are two ways you can do so: by issuing them at the point of incorporation, or by issuing them after your company has already been incorporated.

The process will vary depending on which approach you’ve taken. Let’s take a closer look at each method.

Creating alphabet share classes at incorporation

The easiest way to issue multiple share classes is to do so at the point of incorporation.

You can issue multiple share classes by adding specialist provisions to your new company’s articles of association. These provisions spell out each share class and the rights attached to them. The rights of those shares (called the ‘prescribed particulars’) would then be summarised on the incorporation application (the ‘IN01’ form).

As part of the company formation process, you’ll also need to provide information on which individuals or entities will hold the initial shares of each share class.

Creating alphabet share classes after incorporation

In some cases, you may start your company with one share class and decide that you’d like to issue additional types of shares months (or even years) down the line.

The fundamental process of creating new share classes that has already been formed is similar, although there are a couple of additional steps involved.

To create new share classes for an existing company, the existing shareholders (or ‘company members’) will need to pass a resolution to amend the company’s articles of association, to spell out what classes can be issued and what their rights will be.

In addition, shareholders will normally then need to authorise the company’s directors to issue said shares under Section 551 of the Companies Act 2006. This authorisation states how many shares the directors can issue and within what period (the maximum period allowed is five years).

The company’s directors will then be required to send a copy of the resolutions, together with a copy of the amended articles of association, to Companies House.

Once the articles have been amended and the directors duly authorised, you can then issue shares in the new classes to the relevant shareholders using the usual procedure. Alternatively, if you are seeking to convert existing shares held by shareholders into one or more of the new classes, the company would then need to carry out a ‘re-designation’ – sometimes also referred to as a ‘re-classification’ – of those shares under Section 636 of the Companies Act 2006.

Other share classes you can create

Alphabet shares are certainly the most popular type of share class that companies opt for when choosing to create a multiple share class structure, not least because of their simplicity. But they are by no means the only additional type of share class that a company can introduce. Other examples include:

  • Non-voting shares
  • Preference shares
  • Redeemable shares
  • Deferred shares
  • Growth shares

To help you understand how these share classes work in the context of multiple share classes, let’s take a quick look at each type:

Preference shares

Preference shares are a share class in which the shareholder is entitled to a benefit over other classes of shares.

This entitlement over other classes might be with respect to their portion of company profits. This typically takes the form of a percentage of the value of the shares when they were issued. It is also common for this entitlement to concern capital distributions.

You can read more about preference shares in one of our previous blog posts, Everything you need to know about preference shares.

Redeemable shares

Redeemable shares are shares that are entitled to be bought back at a future date. The date of this buy back (known as a ‘redemption’) could either be fixed, at the discretion of the company director, or at the shareholder’s option.

These types of shares are typically non-voting shares, which means that shareholders are unable to vote on big company decisions. They are most often awarded as part of an employee share scheme, as they provide a means for the company to automatically redeem the shares if the employee leaves the company.

You can read more about redeemable shares in one of our previous blog posts, Redeemable shares – a complete guide.

Non-voting shares

Non-voting shares are ordinary shares that don’t carry a right to vote. Likewise, non-voting shareholders may not be entitled to attend general meetings, either.

Non-voting shares are often issued to company employees or family members, so that some proportion of remuneration can be paid in the form of dividends.

Deferred shares

A deferred share is a type of company share that has no rights – the shareholder has no right to receive dividends, vote or participate in capital distributions.

The usage of deferred shares can vary – for example, existing shares may be converted to deferred shares when those shares are no longer required. Alternatively, deferred shares could be issued with the view to converting them to another (more useful) class in the future.

Growth shares

Growth shares are a type of share that gives the shareholder partial ownership of a UK company. In essence, the company ring-fences the value of the company and then issues growth shares. They then participate in the growth that takes place over the ring-fenced amount – this ‘participation’ usually takes place at an exit (for example, at an initial public offering or a sale). These types of shares don’t normally carry dividend or voting rights.

From a founder’s perspective, growth shares are an attractive share class to issue to employees, because they don’t dilute the founder’s ability to make decisions or receive dividends, but still provide a genuine incentive for the employees to help the company grow.

You can read more about growth shares in our dedicated blog on the subject, The ultimate guide to growth shares.

The bottom line

Multiple share classes can be a shrewd way for company founders to bring other shareholders on board in a non-uniform manner.

Whether it is to give shares to loved ones, launch an employee share scheme, or facilitate joint ventures with other companies – the most popular type of share class to deploy in this instance is, without doubt, alphabet shares.

If you are interested in setting up alphabet shares in your company, or would like to discuss your company secretarial needs, get in touch with Linnear CoSec’s team of experts today.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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