Typically, the most common shares issued by companies are ordinary shares, redeemable shares and preference shares.
There are other types of shares that are less common but are still issued by companies in England and Wales, such as deferred shares, non-voting shares and convertible shares.
Before deciding which type of shares to issue, it is important to consider the consequences of issuing each specific type of shares, to ensure any benefits or rights that accompany the shares align with your long-term intentions for the company.
Different types of shares will affect rights to dividends, voting rights and capital rights; therefore, it is crucial to understand the implications of issuing the different types of shares.
Our Corporate Lawyers provide a comprehensive guide to the types of shares that companies registered in England and Wales can issue.
Ordinary shares
Ordinary shares are the most common form of share.
A share will be an “ordinary” share simply if it is not another type of share such as redeemable or preference. 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.
Ordinary shares are particularly suitable where the company wishes to keep its share capital structure simple, provide flexibility in dividend payments, and ensure that shareholders participate proportionately in both the risks and rewards of the company’s growth.
Redeemable shares
Redeemable shares can be redeemed either at the option of the issuing company or by the holder of the shares. They are generally used to return excess capital held by a company to shareholders, a useful tool that allows capital to be returned without declaring 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 buy back 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 if authorised to do so by the articles or an ordinary resolution.
Companies must comply with the Companies Act 2006 when redeeming shares, 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 to HMRC upon redemption.
By setting clear redemption terms, the company can retain control over when and how the shares are redeemed, while providing shareholders with certainty about the circumstances under which their investment will be returned.
Preference shares
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 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’.
Preference shares are commonly used when investors require priority for dividends or capital but do not seek ongoing involvement in the company's management or decision-making.
They can be particularly attractive in more established businesses with predictable cashflows, as the fixed or preferential dividend offers a lower-risk investment compared to ordinary shares.
Deferred shares
Deferred shares are shares with no right to dividends either for a set period, or until certain conditions are met.
An example of when you may decide to issue this type of share is when you would like a certain level of profitability to be achieved before the shareholder has a right to dividends.
Deferred shares also often have limited capital rights and no voting rights.
Non-voting shares
Non-voting shares are shares that do not carry any right to vote at general meetings of the company, except in limited circumstances prescribed by law, such as where the rights attaching to the shares are being varied or on a winding up.
They are often used where a company wishes to raise capital or reward individuals financially without diluting control of the company.
Non-voting shares may still carry rights to dividends and capital, and these rights can be structured to mirror those attached to ordinary shares or to rank differently depending on the company’s intentions.
The specific rights attached to non-voting shares must be clearly set out in the company’s articles of association, as the absence of voting rights does not automatically limit other shareholder rights unless expressly stated.
Convertible shares
Convertible shares are shares that can be converted into another class of shares, most commonly ordinary shares, either automatically or at the option of the company or the shareholder.
They are often used in investment scenarios where an investor initially receives a class of shares with preferential rights, such as a fixed dividend or priority on a return of capital, but with the ability to convert into ordinary shares if the company performs well or upon the occurrence of certain events, such as a sale or listing of the company.
The terms of conversion, including timing, conversion ratios and triggering events, must be clearly defined in the articles of association or in a shareholders’ agreement. Special care must be taken when issuing convertible shares to ensure compliance with the Companies Act 2006 and to consider the potential impacts on existing shareholders upon conversion.
Key considerations when issuing shares
The ability to issue different classes of shares provides companies registered in England and Wales with significant flexibility when structuring ownership and control.
Each type of share carries its own combination of rights and restrictions, affecting dividends, voting power and entitlement to capital, and these differences can have important legal, commercial and tax consequences.
Careful consideration should therefore be given to the purpose of each share issue and how the rights attached align with the company’s wider objectives and growth strategy.
As the rights attaching to shares must be clearly set out in the company’s articles of association and comply with the Companies Act, companies should seek appropriate legal advice before issuing or varying share classes to ensure the chosen structure achieves the desired outcome and avoids unintended consequences.
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