The Different Classes of Shares & How Can I Convert From One Class To Another?

The share system offers extensive flexibility, meaning shares can fall into numerous categories, depending on how the company decides to structure its stock. Differences between shares can be both large and subtle, with varying outcomes on the rights and dividends of shareholders. This article explores that, along with shares can change from one class to a new one.

‍

Ordinary Shares

Ordinary shares entitle their holders to voting rights and equal rights to dividends. Should the company face dissolution, each shareholder has a right to participate in the distribution of capital. Companies are able to create different categories of ordinary shares, which they can then call alphabet shares because of how they are named, eg. class A shares, class B shares. That is to highlight differences between the shares.

The differences tend to revolve around concentrating voting power, so class A shares tend to carry more voting power per stock than the typical class B share. These votes are cast at the company’s annual general meeting, where stockholders elect board members and help to decide important company decisions. Shareholders are also able to voice their concerns.

Likewise, some may be deferred ordinary shares. In which case, the shareholders receive dividends after ordinary shareholders have been paid a minimum amount. The distinction may also point to either or one of the classes being redeemable. And redeemable shares are those that the company has the option to buy back, on terms agreed with the investor.

‍

Preference Shares

The other class of shares is preference shares. The shareholders typically have no voting rights, though this can change if their dividends happen to be in arrears.

Holders of preference shares receive their dividends before holders of ordinary shares, often at a fixed rate. And dome preference shares may also be redeemable, meaning the company has the option to buy them back under pre-agreed conditions.

If the company faces liquidation, preference shares are the first to be paid out.

By and large, they are a conservative form of investment that is best suited to those who want no active role in the company, but simply steady and somewhat more stable returns instead.

‍

Converting from One Class of Shares to Another

Shareholders have the option to change the categories of the shares they hold, provided the shares in question are convertible.

The most common types of conversions are between subclasses of ordinary shares, from class A to B, or any of the number of categories of common stock a company has issued. This process is also referred to as reclassifying or re-designating stock.

It offers various advantages. Some may use it as an opportunity to manage finances and decisions made by the company, or they may leverage it to alter both voting rights and the distribution of dividends and capital. This process also makes it possible to bring in investors, plan taxes and offer dividends without diluting control. It can also help to enhance estate planning or allow for issuing shares to employees and family members.

The procedure for changing shares from one class to another must be clearly laid out in the Articles of Association. If it is not, the board has to pass a special resolution, which 75% must vote in favour of.

If a procedure has already been specified, members of the board of shareholders pass an ordinary resolution enabling the re-designation to go on.

Three important details must be noted:

• The name of the shareholder and the number of shares for which the class is being changed
• The previous class of the shares
• The new class of the shares

Once the resolution is passed, the company submits a form to the Accounting and Corporate Regulatory Authority, where the process is given full validation.

Convertible preferred shares go through a different process. By the time of purchase, a time and date would already have been set, by which the shareholder can convert their stock at a fixed rate.

Each company often has its own structure for issuing shares, along with motivations for adopting a certain structure. But the conversion of shares between different classes is largely the same, in line with the terms within the Companies Act.

‍

When in Doubt, Reach Out!

Here at Sprout, we want you to focus on what you do best, while we take care of the rest. Check out our budget-friendly corporate secretarial services, allowing us to simplify your company administration and draft resolutions for share related matters. Feel free to contact us with your questions, we’ll respond within 24 hours.