What is the Purpose of Alphabet Shares?

Creating different classes of alphabet shares allows a business to pay different rates of dividends and attach different rights according to shareholders’ individual shareholdings.

Implementing alphabet shares is a flexible, efficient, and often tax-efficient method of structuring your business, as often shareholders pay different rates of tax.

What are alphabet shares?

Alphabet shares is the term used to describe different classes of ordinary shares within a company, typically denoted by letters – A shares, B shares, C shares etc. They enable flexibility for future changes in the dividends paid to each shareholder without having to change the shareholding.

Alphabet shares can also provide businesses with an alternative way to raise equity finance as their company expands and more shareholders join.

Typical use cases of alphabet shares include:

To issue different classes of shares in family companies

It is common for family companies to distribute shares between family members to allow them to receive dividends, split income and improve tax-efficiency (upon receiving independent tax advice).

To pay dividends at different rates to individual shareholders

Dividends can be used as a tax-efficient way of paying directors and shareholders instead of paying them a salary.

For instance, alphabet shares can be used to pay different rates of dividends to individual shareholders. For example, shareholder A may hold all the company’s A shares and Shareholder B may hold all of the company’s B shares.

In this case, the Articles of Association must be amended to allow the company members to differentiate between classes of shares and the rates of dividends payable. This is because the Model Articles or Table A – which are the default Articles of Association that apply if a company does not implement its own Articles – require that dividends are paid in proportion to the number of shares held. We will usually suggest a shareholders agreement as well.

To award shares to employees

You can use alphabet shares to safely operate schemes that allow employees to be partly paid in the form of dividends.

Such schemes can encourage employee loyalty and engagement in the business while being tax-efficient. The classes of shares awarded to employees will vary depending on the way the scheme is set up, but typically the shares will be non-voting with the proviso that the shares are taken back by the company should the employee leave the business.

Don’t give your employees shares in your business without doing these things first.

To facilitate joint ventures

Where two or more independent companies embark upon a joint venture, they often use alphabet shares to define each joint owner’s rights.

For example, where two companies set up a new third company, company A may own all the A shares and company B may own all the B shares. The new company’s Articles and/or Shareholders Agreement will then set out the various provisions attached to each owner’s class of shares.

How to set up alphabet shares

1. The company creates a new class (or classes) of shares.
2. The new classes are set out in the company’s Articles of Association.
3. The new articles detail that the new share classes are adopted by special resolution, but can be passed by a written resolution.
4. Once the new share classes have been created, the company decides to either allot new shares of the classes concerned, or have existing shares converted to the new classes.
5. Directors and shareholders should consider and approve the changes to the company’s articles. These can be passed as written resolutions under the new procedures in the Companies Act 2006.
6. Notices of the statutory forms and resolutions are sent to Companies House.
7. We’d usually suggest a shareholders agreement as well.

Independent legal advice

You should always seek professional advice to ensure the distribution of alphabet shares does not breach any tax or other regulatory laws.

For step-by-step advice on how to set up alphabet share structures, issue new shares, and protect shareholder rights, get in touch for independent legal advice that you can trust.

I can help you to review, draft, and amend Articles of Association and Shareholders Agreements, and advise on other shareholder rights considerations such as minority rights, exit strategies, and board management.