Shareholders are people, companies, or institutions that own at least one share in a company. They are also known as ‘members. A company’s ownership is divided into shares. One person can own 100% of a company’s shares (common in micro businesses set up as a company). In other cases, large numbers of people or entities can own 10% of shares or less. Because shareholders own the company, they are entitled to a share of the profit, known as dividends.
The Companies Act 2006 (CA 2006) gives shareholders certain rights, as does the company’s Articles of Association (Articles), and Shareholders’ Agreement.
One of the main factors that establishes a particular shareholder or group of shareholders’ rights is the class of shares they hold.
What ‘Classes’ of Shares Can a Company Offer?
Section 629 (1) of the CA 2006 provides that shares are of the same class if they have uniform rights attached to them. Simply naming groups of shares differently will not necessarily create different classes. This was illustrated in Routledge v Skerritt [2019] which concerned a Special Resolution re-designating 10,000 ordinary shares as 9,500 ordinary A shares and 500 ordinary B shares. The only difference in the rights was that the Special Resolution assigned the ordinary A shares preferential rights as to dividends and the ordinary B shares deferred rights as to dividends, in each case “in accordance with the policy in relation to dividends as made and as amended by the [board] from time to time”.
The High Court considered the absence of a written board dividend policy communicated to the shareholders to be critical in determining whether the ordinary A and ordinary B shares did or did not have differing rights to receive a dividend. Without this, the Special Resolution merely designated the shares and the two ‘classes’ ranked pari passu (equal footing) when it came to dividends.
If only one class of shares exists, the shares will be known as ordinary shares. Ordinary shares form the basis for the liabilities and rights of any other classes of shares created. For example, preference shares will rank higher than ordinary shares in terms of receipt of capital, dividends, or both and deferred shares will rank lower.
What Rights are Attached to Different Classes of Shares?
There are certain universal rights that apply to all shareholders, regardless of the class of share they hold, including:
- The right to look at key documents such as the Director Service Agreement and Shareholders’ Agreement, and company records, for example, minutes and resolutions of general meetings.
- The right to bring a claim against the directors for negligence or breach of duty or file a petition for unfair prejudice.
- Receive notice of general meetings and be able to attend and vote.
- Be added to the register of company members and receive a share certificate.
The company’s Articles and Shareholders’ Agreement may also give rights to shareholders over and above the universal rights based on the class of shares they hold. For example:
- Different classes of shares can have distinct rights to dividends. Preferred shares may receive dividends first and deferred shares may have to wait until specific conditions are met.
- If the company is wound up, certain classes of shares may get paid out first.
- Distinct voting rights attached to share classes.
In some cases, only shareholders with a specific percentage of shares can make a decision. For example, if a company takeover offer has been made, only shareholders who hold 90% or more of the organisation’s shares can approve the compulsory sale of the business (known as a squeeze out). And, only those with 50% shareholding have the power to block an ordinary resolution.
What are Shareholders’ Rights Regarding Dividend Payments?
A dividend is a payment from the company’s profit and there are two key types, namely:
- Final dividends. These are paid annually and are calculated after the company’s annual accounts are drawn up. Typically, final dividends are declared by shareholders (in the case of a public company, usually at the company’s annual general meeting) following a recommendation from the Board.
- Interim dividends. These can be paid at any time throughout the year and are calculated before the company’s annual earnings are determined. Typically, they are decided solely by the Board, without shareholder approval, and can be paid if the directors are satisfied that this is justified having regard to the company’s profits and future financial requirements.
It is important to note that the Articles can state some classes of shares are entitled to little or no dividends.
Shareholders cannot vote to pay a greater dividend than is recommended by the Board, but they can vote to reduce the dividend if they believe it is too much and could damage the company’s profitability and reputation.
What are the Filing Requirements Concerning Classes of Shares?
You must notify the Register of the Companies House of:
- Details of the name and designation assigned to any class or description of shares.
- Particulars of any variation of the rights attached to a specific class of shares.
- Particulars of the rights attached to a new class of members created by a company without a share capital.
These notifications must happen within one month of the change occurring.
How We Can Help
An experienced Corporate Law Solicitor can advise directors and shareholders on shareholders’ rights. They can also draft Articles and Shareholders’ Agreements to help prevent misunderstandings and disputes from developing.As experts in corporate law, we can provide expert advice and representation on all company law matters. Contact us on 0330 173 6983 or send us an email for more information.
