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We are starting a limited (by shares) company with partner (in England).

We wanted to model it in way that I have 70% of dividend and capital distribution rights and my partner 30%, but we both have 50%/50% of voting rights.

We structured our stocks like this using a wizard on the Companies House website

Class A shares (for dividends and capital)
votes: "No votes per share"
dividend: "Each share is equally entitled to a distribution of dividends"
capital: dividend: "Each share is equally entitled to a distribution of capital" (70% of those shares assigned to me and 30% to my partner)

Class B shares (just for voting)
votes: "Each share is entitled to one vote in any circumstances"
dividend: "No dividend distribution rights"
capital: dividend: "No capital distribution rights"
(50% of those shares assigned to me and 50% to my partner)

We've got a rejection with reason "Class B shares do not mention any dividend rights" (but we covered dividend rights already by Class A shares).

We thought that this is whole point of different classes of shares: Class A shares give dividend and capital rights and Class B give voting rights.

What are we doing wrong here?

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  • Were you explicit that Class B shares have no dividend rights or did you just not mention dividends in relation to Class B? – Dale M Sep 16 '20 at 21:13
  • thanks for response @DaleM There is wizard on Companies House website for starting Ltd company. When adding different classes of shares it asks you if given share class is eligible for dividend and you can click yes/no, so I've cliked "no" for class B and "yes" for class A, so I assume that it's explicitly declared. And form that you confirm before submitting application also shows "No dividend distribution rights" for class B – mck159 Sep 16 '20 at 22:02
  • With 50/50 voting rights, how are you two intending to make decisions when you disagree? – Greendrake Sep 17 '20 at 4:43
  • @Greendrake litigation? Short of that decisions have to be unanimous but there is really no avoiding that in a 2 member company - the alternative is to give one or the other all the power. Also, the only real vote shareholders make is who the directors are - there might be 7 of them. – Dale M Sep 17 '20 at 8:54
  • @DaleM "the only real vote shareholders make is who the directors are" - that's not true. The most obvious example is the power to amend articles (s 21(1) Companies Act 2006), by way of which the members can effectively do anything else which can be achieved via the articles (e.g. require the company to act/not act). Other examples include the power to call general meetings (s 303), the power to propose written resolutions (s 292(1)), and the power to ratify acts of directors (s 239). Furthermore, the articles may specify additional members' powers (subject to any restrictions in the Act). – JBentley Sep 23 '20 at 11:15
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Typically you would have the following set up:

  • Class A shares: these would have all the voting rights
  • Class B shares: these would have all the dividend rights
  • Class C shares: these would have all the capital rights

So in this case, you would split Class A 50/50 and Classes B and C 70/30 between you and your partner. It's likely that whoever processed your application is used to this set up (Class B shares are ordinarily just dividend ones with fewer rights attached) and wrongly rejected your application.

Splitting the shares in such a fashion also allows you to assign more Class A shares in the future without also granting capital rights too, if that was something you wanted to do in the future.

Try going through the wizard with that share structure and see how you get on.

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  • Thanks for response This is almost what I did. I did following through the wizard: Class A shares: all dividend and capital rights (so Class A and B that you proposed but merged into one class) with 70/30 split, Class B: all voting rights with 50/50 split. In this scenario all the rights are still covered (dividend and capital by class A and voting by class B), so I don't understand why my application was rejected – mck159 Sep 16 '20 at 22:28
  • I think it's the fact they expect Class B shares to be focused solely on dividends. – Matthew Sep 16 '20 at 22:58
  • Makes sense. I've read that shares names are not specified by law at all, so looks like this is just most popular convention? My understanding is that I can call my stock classes Abcd, Giraffee, Blue etc. and there's nothing in a law that would forbid me doing it (or that would guide me how to name stocks). So seems that there's nothing wrong with my split, but Companies House might have just assumed most popular shares naming convention? – mck159 Sep 17 '20 at 0:40
  • That's correct, re share class names. I suspect the software itself is hard-coded to expect Class B shares to be dividend ones, but it might also be a bug. It's worth contacting Companies House about it to see if they can help you. – Matthew Sep 17 '20 at 11:11

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