Share Reclassification, It’s Easy As A, B, C…

…Or is it? MJB Avanti Director Steve Foster discusses the key points for consideration when changing a company’s share capital.

Every now and again a company client will approach us with a question related to the possibility of paying variable dividends to shareholders who have the same percentage shareholdings. Alternatively, they may want to issue shares to an employee who they wish to incentivise by way of dividend payments rather than by way of bonuses.

This article briefly examines some of the issues that arise.

Take an example of a company with two equal shareholders, with the same capital and dividend rights. They want the shareholders to receive non proportionate levels of dividend. Their current situation requires that any dividend declared must be paid equally to both shareholders. They may consider supporting the non-proportionate dividend payments by way of a dividend waiver but there is an alternative as set out below.

The alternative is the use of so-called ‘alphabet shares’.

In our example, the shares held by shareholder one can be re-designated as ‘A’ Ordinary shares and the shares held by shareholder two can be re-designated as ‘B’ Ordinary shares.

The result is that the two shareholders will be deemed to hold two different classes of shares but with the same general rights as before. The company can declare dividends on different dates, and at different rates, for each class of share.

To extend the example, the company has a key employee who is responsible for a particular segment of the company. The employee oversees the development of that segment. They can be partly incentivised by way of a new class of shares, ‘C’ Ordinary shares. The level of dividend paid on those shares can be set to reflect the future growth of the segment.

The above demonstrates that the use of alphabet shares can be a useful mechanism for clients seeking to pay variable dividends that are not intended to be tied to a shareholder’s percentage holding in the company.

Any change to company structure must be carefully considered

Any share changes must be carefully instigated, particularly to ensure that future dividend payments are not deemed by HMRC to be disguised remuneration. Professional advice should be sought before any changes are made.

Further, where changes are made to a company’s share capital, whether relating to the issue of a new class of shares, the re-designation of an existing class of shares, or a change of rights attaching to a particular class, any company secretarial changes must be carefully considered and executed. These will often relate to director/ shareholder resolutions, and the possible change to the company’s Articles of Association at Companies House.

If you are considering a change in your share structure, possibly too incorporate variable dividends, MJB Avanti will be happy to advise you about the company secretarial and tax effects of the proposed changes.