How and why companies should use Alphabet Shares
The ownership of a limited company is divided up into shares. These are portions of the company owned by shareholders or members that entitle them to some of the profits. There are four main types of company shares – ordinary, non-voting, preference and redeemable, all of which convey different rights to the shareholder. Most companies have just one type of share; commonly, ordinary shares. But many people are unaware of a different class of ordinary share – alphabet shares. We take a look at what alphabet shares are, and how they can be used.
What are Alphabet Shares?
Alphabet shares are an efficient way to differentiate shares by using letters of the alphabet i.e. ‘A’ shares, ‘B’ shares, ‘C’ shares, etc. They enable companies to separate shareholders into different groups, so that dividends can be paid at different levels for example.
Alphabet shares can be attached to whatever rights have been allocated in the company’s articles of association. They enable flexibility for future changes in the dividends paid to each shareholder, without having to change the shareholding, and can also provide businesses with an alternative way to raise equity finance as their company expands and more shareholders join.
While different classes of alphabet shares have the ability to pay different dividends, they usually rank as equal in all other aspects – e.g. providing the same voting rights.
MSP Company Secretarial can provide support, guidance and practical assistance if you are considering implementing alphabet shares. Find out more here.
When can Alphabet Shares be used?
Alphabet shares are mainly used to pay shareholders different amounts of dividends, depending on what class of share they own. This may be particularly useful if shareholders pay different rates of tax. They may also be used to give entitlement separate from the rules for ordinary shares (for example, limited rights to vote at general meetings).
In order to pay different dividend rates on A shares and B shares, etc, there must be a clause in the articles of association enabling directors/members to vary the dividends between one class and another. This would override provisions in the Model Articles or Table A that require dividends to be paid in proportion to the number of shares held.
Who can benefit from the use of alphabet shares?
Alphabet shares can be a helpful way to give company employees dividends as part of their remuneration package, acting as an incentive for employees and a tax-efficient means of payment. In smaller companies a different letter of the alphabet could be used for each employee for maximum flexibility (provided a power to vary dividends is included in the articles, as outlined above).
And as these shares are usually non-voting and may be redeemable at par (like-for-like) value (i.e. £1 on a £1 share) companies can set them up to be returned if an employee leaves the company.
MSP Company Secretarial can provide support, guidance and practical assistance if you are considering implementing alphabet shares. Find out more here.
Family companies
Issuing shares to the directors’ family members enables income from the company to be spread among the family by paying them dividends, and for longer term capital tax planning reasons.
Different amounts can be paid to different family members as required (provided this is included in the articles, as outlined above). These shares can be voting or non-voting, redeemable or non-redeemable and have other rights or restrictions as required.
If you are a family business and you are considering alphabet shares, MSP Company Secretarial can help. Find out more here.
Joint ventures
For companies that are setting up as a joint operation between two or more independent companies, alphabet shares are often used to provide each of the joint owners with representation on the board, along with other rights.
For example, if Company A and Company B create a joint venture called Company C, it could include A shares (held by Company A) and B shares (held by Company B). Company C articles may then contain provisions that protect Company A and Company B – for example ensuring that a certain number of directors can be appointed or removed by the two different shareholders. It could also state that certain steps (such as allotting/transferring shares etc) can only be taken with the consent of both groups.
If you are setting up a joint venture, then MSP Company Secretarial can help. Contact us here.
6 steps to set up alphabet shares
- The company creates a new class (or classes) of shares.
- These new classes are set out in the company’s articles of association.
- The new articles detail that the new share classes are adopted by special resolution, but can be passed by a written resolution.
- Once the new share classes have been created, the company decides to either allot new shares of the classes concerned, or have existing shares converted to the new classes.
- Directors and shareholders should consider and approve the changes to the company’s articles. These can be passed as written resolutions under the new procedures in the Companies Act 2006.
- Notices of the statutory forms and resolutions are sent to Companies House.
Things to be careful of
Ensure that your company’s articles of association identify what rights are attached to each different class of share. If this is not done, they will rank pari passu with one another – meaning they will all rank equally.
Careful consideration with competent professional advice should always be given to tax issues before instigating the use of shares. HMRC may insist that the payment is a type of salary and not the intended return on capital and should be subject to PAYE and National Insurance contributions (NIC).
In the often quoted HMRC v PA Holdings Ltd case, PA Holdings Ltd created a series of different share classes in a subsidiary company to pay bonuses to employees as dividends rather than employment income. The Court of Appeal found that the payments were emoluments and as such subject to NIC. This case involved a highly contrived scheme that was set up purely for tax avoidance purposes.
HMRC has said that it will not attack alphabet share structures as long as there is no contrived arrangement to avoid tax or NIC. However, to prevent a challenge, the company should have sufficient distributable profits, so that dividends are capable of being paid on all classes of shares.
Before issuing shares, a company and its owners should be aware of the implications of diluting the existing share capital and bringing someone in as a shareholder.
You should always seek professional advice, to ensure the distribution of alphabet shares does not breach any tax or other regulatory laws.
MSP Company Secretarial can help businesses of all types use alphabet shares effectively. Contact us today for a no-obligations chat.
How can MSP Company Secretarial help?
MSP Company Secretarial provides consultancy, practical support and fractional Company Secretary services. We can help with your annual reporting requirements by:
- Providing guidance and advice on alphabet shares, voting rights and dividend waivers
- Help businesses of all types with corporate structures, company formation, and articles of association
- Complete company reports and advise on HMRC reporting requirements
- Assist with meetings, minutes, and share classes
Speak to our team and discuss your requirements with us.
Alphabet Shares: Frequently Asked Questions
How many classes of alphabet shares can a company have?
There is no legislation for the upper limit on the number of share classes a business can create. For convenience in practice, most companies create a maximum of three (A, B, and C). Each share class can carry its own entitlements, including dividend levels and voting rights. This gives directors more flexibility in how ownership is structured. Each new class must be distinguished clearly from existing ordinary shares in the articles of association. The more classes available, the more administrative resources will be required.
Do you need to inform Companies House when issuing alphabet shares?
It is a legal requirement to inform Companies House when issuing alphabet shares. The articles of association should be amended and new share classes created, then the relevant statutory forms must be filed within a required timeframe. If a change to an organisation’s share structure is not properly registered then it will not be legally recognised. This can cause compliance issues, especially during investment phases.
What happens to alphabet shares when a shareholder leaves a company?
The answer largely depends on the share rights attached to the relevant class when it was issues. Redeemable shares give the company the option to buy them back on exit, which also removes any associated voting rights cleanly and without dispute. Where shares are non-redeemable, a separate transfer or buyback process is needed. Having share rights properly defined in the articles of association from the start makes shareholder exits considerably more straightforward to handle.
Can alphabet shares affect a company’s ability to raise future investment?
Creating multiple share classes can create complexity within the share structure, which may sometimes deter Venture Capital looking for a simple commitment. Investors may raise queries about voting rights for each share class and directors should think about how an existing structure would perform during a round of fundraising before reorganising share classes.
What are the tax implications of issuing alphabet shares?
Alphabet shares can provide benefits to tax allowances for privately owned and managed businesses, however the tax implications should undergo stringent considering before issuing shares. HMRC may investigate a share reorganisation to ensure it has not been made solely to move income from a higher rate to a lower rate taxpayer. This is more common in family businesses. Make sure you receive professional, expert advice before issuing alphabet shares to ensure the organisation and its directors remain compliant with HMRC guidelines or tax laws and avoid any costly tax risk.
How do alphabet shares benefit dividend rates?
In organisations with a single class of ordinary share, the dividend should be paid to all shares in proportion to the amount held per shareholder. Adopting a share structure with multiple classes, such as A, B, and C tiers, provides flexibility for organisations in how they manage dividend entitlements. For instance, the company may adapt different dividend rates for class A shares vs class B, or they may decide to only pay dividends to class A and not B. This allows greater control on behalf of the organisation, allowing greater reward for active directors vs silent shareholders without impinging on a shareholder’s dividend rights.
What is the difference between alphabet shares and dividend waivers?
The main difference between dividend waivers and alphabet shares is that the latter is a permanent change to the share structure, while a dividend waiver is a one-off action by a shareholder to give up a dividend. As with alphabet shares, HMRC guidelines are clear on dividend waivers, they must not be implemented to move tax liability from a higher payer to a lower band payer (sometimes the case in family businesses). If both dividend waivers and alphabet shares are employed in an organisation, then the tax risk is even greater, and serious consideration should be paid to tax implications of this strategy.
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