Share Classes Explained: A Guide to Ordinary, Preference and Alphabet Shares
When you enter into a contract, you expect each party to stick to their promises. But sometimes, even if you have done your part, the other party may not follow through. If that happens, you may wonder how to get out of an unfair deal. This process is called “rescission”. In this article, we consider what rescission means, how to rescind a contract, when you can use it, and what happens next, as well as give practical advice on what initial steps you can take if you are in this situation.
When setting up or restructuring a company, one of the most important decisions is how to divide ownership between shareholders. This is done by issuing shares, and not all shares are created equal. The type, or “class”, of share you choose can affect voting rights, dividend entitlements and how investors interact with your business.
Below, we outline three of the most common share classes and how they work in practice.
Ordinary Shares
Ordinary shares are by far the most common type issued by UK companies. They typically carry one vote per share, giving shareholders the right to participate in company decisions. Holders may also receive dividends, although these are not guaranteed and will depend on whether the company declares them. In the event the company is wound up, ordinary shareholders are paid last, after creditors and holders of other share classes with preferential rights.
Because of their straightforward structure, ordinary shares are often issued to founders, directors, and early-stage investors.
Preference Shares
Preference shares give their holders certain rights and advantages over ordinary shareholders. One of the main benefits is priority when it comes to receiving dividends. In many cases, these dividends are set at a fixed rate, making preference shares attractive to investors looking for more predictable returns.
Preference shares may also have preferential rights over capital on an exit and/or winding up. On an exit, such as a sale or IPO, or in a liquidation scenario where the company is wound up, preference shareholders have a priority claim to the company’s capital. This is typically outlined in a “liquidation preference” clause, which guarantees that they are paid back their initial investment (and sometimes a multiple of it) from the proceeds before any money is distributed to ordinary shareholders. This right means that in a winding-up situation, preference shareholders are first in line to receive their capital back after all creditors have been paid, offering a strong form of capital protection. Some preference shares may also be “participating,” allowing the holder to first receive their liquidation preference and then also share in the remaining proceeds with ordinary shareholders on a pro-rata basis. This ensures that in any scenario where the company ceases to operate or is sold, the preference shareholder’s investment is protected, while ordinary shareholders are last in line and may receive nothing if the remaining assets are insufficient.
However, preference shares often carry no voting rights, meaning holders may have less influence over company decisions. This trade-off is sometimes acceptable to investors who value income security over control. The specific rights attached to preference shares can be tailored and will usually be set out in the company’s articles of association.
Alphabet Shares
Alphabet shares are essentially ordinary shares divided into different classes, often labelled A, B, C and so on. The main advantage is flexibility. Directors can declare different dividend amounts for each class, which can be useful where shareholders are to be rewarded in varying proportions.
This arrangement is also common when companies wish to incentivise certain staff members or directors/founders without affecting the entitlements of others. Voting rights and other terms can also vary between classes, providing a high degree of customisation.
Why Share Classes Matter
Choosing the right mix of share classes can make a business more appealing to investors, provide flexibility in how profits are distributed, and help maintain control while rewarding others. That said, it is vital that any share structure is carefully thought through and properly documented in the company’s articles of association and, where appropriate, a shareholders’ agreement.
Final Thoughts
Whether you are starting a company, seeking investment, or restructuring ownership, the choice of share classes can have long-term consequences for governance, control, and profit allocation. The right structure can strike a balance between flexibility and stability, but it should always be tailored to the needs of the business and its stakeholders.
If you are considering issuing or changing share classes, it’s important to seek professional advice to ensure your arrangements are both effective and compliant with UK company law.
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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.