Following on from our previous article on share classes, this blog considers the types of share that companies can issue.
Companies in England and Wales generally issue three types of shares – ordinary shares, redeemable shares and preference shares. Within each type of share a company may decide to split them into separate classes. There are numerous benefits of issuing different types of shares for both companies and shareholders, including different options to return capital to shareholders (other than via a dividend) and minimising risk for investors.
Shares are ‘ordinary’ if they are not of another type, such as redeemable or preference shares. This is the most common type of shares in English and Welsh companies. They may hold any nominal value, for example a penny, a pound or more and contain a variety of rights relating to voting, dividends and capital.
Redeemable shares can be redeemed either at the option of the issuing company or by the holder of the shares. They are generally used as a method for returning excess capital held by a company to shareholders, a useful tool to return capital to shareholders without the need to declare a dividend.
Redeemable shares can only be issued by a company if it has already issued ordinary shares - a company cannot be incorporated with only redeemable shares or buyback all of its other types of shares if this would leave only redeemable shares. They may be voting shares but are usually issued as non-voting.
The terms of redemption can vary greatly. Common terms include a fixed redemption date, discretion to either the company, the holder, or both, to redeem the shares within a set range, or allow redemption in a fixed number of tranches over a range of dates. The terms of redemption are usually stated within the articles of association of the company, though they can also be left to the discretion of the board.
Companies must comply with the Companies Act when redeeming shares, otherwise the acquisition will be void. Unlawful redemptions may expose directors of the company to personal liability for a criminal offence with a sentence of up to two years, an unlimited fine or both. Shares must be fully paid in order to be redeemed, the redemption must be approved by the board and a notice sent to the shareholder. There is no requirement to sign a stock transfer form (though this approach may be adopted for completeness) and stamp duty is not payable following the redemption to HMRC.
Preference shares usually rank ahead of ordinary shares in relation to both dividends and capital but carry limited or no voting rights. They usually entitle the shareholder to a fixed dividend, providing the holder with a guaranteed fixed income from the shares (though this is not an absolute requirement). This fixed income means that the holder will not benefit if the company is successful as the rate of dividend will not increase. They are generally a lower risk form of investment than ordinary shares, issued for lower nominal values than ordinary shares and are therefore held in much higher proportions than ordinary shares. If preference shares do hold a right to a fixed dividend they are usually outside of the ‘ordinary share capital’ of the company, meaning that they do not benefit from entrepreneur’s relief upon a disposal, however see our blog on the recent case of Stephen Warshaw V HMRC for commentary on this point and the need to take care to ensure that the rights attaching to preference shares do not inadvertently cause them to fall within the definition of ‘ordinary share capital’
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