Alphabet Shares ' Is It As Easy As ABC?

• Published date: 14 August 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Gorvins Solicitors
• Author: Mr Christian Mancier

Basic share rights

If a company has one class of shares these are commonly called "Ordinary Shares". An ordinary share typically has 3 rights attached to it as follows:

1. The right to share in any surplus capital (this is essentially what is left over if the company turned all its assets into cash and paid off all of its liabilities or the sale proceeds if the company was sold to a third party).
2. The right to a dividend (a dividend is surplus profits made by a company which are then paid out, in whole or in part, to the company's shareholders).
3. The right to attend and vote at a meeting of a company's shareholders.

Where a company only has one class of share then the above rights are usually pro-rata. As such if you have a 10% shareholding you would essentially get 10% of any sale proceeds, get 10% of any dividends paid to the shareholders and carry 10% of the votes at a shareholder meeting.

What are alphabet shares?

Alphabet shares are where one shareholder will hold A Ordinary Shares (A Shares), another will hold B Ordinary Shares (B Shares), another will hold C Ordinary Shares and so on. By drawing a distinction between an A Share and a B Share you can start varying the basic rights set out above so they apply to one class of shares and not another.

For example, if a company had A Shares and B Shares it could be that the A Shares and B Shares rank equally (i.e. pro rata) for surplus capital/sale proceeds, the A shares have full voting rights but the B Shares are non-voting shares and differing dividends can be declared across the A Shares and B Shares (meaning dividends don't have to be paid out on a pro-rata basis).

Why implement alphabet shares?

More often than not the main driver for implementing alphabet shares is tax efficiency by allowing a company to pay out different dividends to different shareholders on a non-pro-rata basis such that a 10% shareholder could receive say 40% of any dividend declared. By way of illustration, if a husband and wife own shares in a company 50/50, if one is a higher rate taxpayer and the other is a lower rate taxpayer then it might be tax advantageous to pay a bigger dividend to the lower rate taxpayer. In a situation where there are no alphabet shares then any dividend would have to be paid pro-rata to shareholdings (i.e. 50/50) and more tax would potentially be payable.

So what can go wrong?

When implementing alphabet shares the most common mistake we see is companies who have simply converted their existing...