Welcome to the first article in our mini-series covering the basics of shares.

In this first article, we provide an overview of the main things you should know about shares.

Just to note – not every company type will have a share capital (for example, some companies are limited by ‘guarantee’ rather than by shares). The focus of this series is on UK private companies limited by shares.

What is a share?

When we talk about a share, we mean a share in the company’s issued share capital.

Parties who own shares are referred to as the ‘shareholders’ or ‘members’ of the company. The initial shareholders of a company (from incorporation) are also known as the ‘subscribers’.

Shareholders are sometimes referred to as the ‘owners’ of the company, as they own a portion of the company’s issued share capital. This does not mean that they directly own the company’s assets.

Shareholders will generally hold a share certificate to evidence their shareholding.

Nominal value

Every share must have a fixed cash value associated with it, and shares cannot be allotted at a discount this amount. This is called the nominal (or ‘par’) value of the shares.

The nominal value is not necessarily the same as the market value of the shares (which might be subject to change). Generally the nominal value will be in Sterling, but it is possible to use different currencies.

Adding together the nominal value of all shares gives the total share capital of the company. For example, if there are 100 shares in issue each with a nominal value of £1, the total share capital is £100.

Number of shares in issue

The number of shares will vary between companies depending on the structure required in each case. A private limited company must be set up with at least one share.

When deciding on the best structure for your company, you might wish to consider how many shareholders there will be, whether additional shareholders might join in future, and how many shares each party will each hold. Whilst there’s no maximum to the number of shares that can be issued, the shareholders will ultimately have to pay for them, e.g. if you wish to issue 100,000 shares, you may wish to set a nominal value of £0.01, rather than £1.

Share types and share class rights

‘Ordinary’ shares are the most common type of share (and typically have voting, dividend and distribution rights), however it is possible to have multiple kinds (or ‘classes’) of shares. The number and classes of shares will vary between different companies depending on the ownership structure required in each case.

Other commonly encountered share class types are:

• ‘alphabet’ shares (e.g. Ordinary-A, Ordinary-B, etc.) – these typically have the voting and distribution rights of ordinary shares but with separate dividend rights. This means that a dividend can be paid on one class without the need to pay on the other classes;
• Preference shares – these generally give shareholders preference over the ordinary shareholders when it comes to dividends or distributions;
• Redeemable shares – these will have a fixed redemption date (or can be redeemed at the company’s discretion) which means the company can buy-back the shares in the future at a pre-determined price. It is not possible to only have redeemable shares in issue; and
• Deferred shares – these generally have very limited rights (and are often created as an alternative to cancelling shares).

When creating different share classes, it is important to consider the rights and restrictions attached to each class. For example, careful thought should be given to decide whether the shares will have voting rights attached to them (see below), whether the holders will be entitled to receive dividends or have a right to capital distributions.

The rights attached to different share classes may be viewed in the incorporation documents, the documents detailing the issue of further shares, the company’s articles or any potential shareholder agreements.

The importance of voting rights

When considering how to divide voting shares between shareholders, overall control should be considered. Aside from the directors, it is shareholders who have the final say in a company’s management by the passing of shareholder resolutions.

Ordinary resolutions require an overall majority (i.e. >50%). All matters can be dealt with by an ordinary resolution unless the Companies Act, the company’s Articles or a shareholders’ agreement state otherwise.

Special resolutions and extraordinary resolutions require a 75% majority. Significant matters are dealt with by special resolution, such as change of company name, reducing share capital, allotting more share capital, altering the Articles, issuing different classes of shares, winding up a company, etc.

A shareholder who wants to retain control of a company may have to consider owning 75% of the voting shares. If two people invest in a company with an equal number of shares, they could effectively be “deadlocked” and unable to pass any shareholder resolution.

Shareholders and shareholder information

A shareholder may be an individual or a corporate entity (such as another company or an LLP). Shares may also be held ‘jointly’ between two or more parties.

Sometimes a nominee (or ‘trustee’) will be registered as holding shares on behalf of a beneficial owner. This is a common arrangement where shares are held on behalf of a child until they are 18 years old.

Some types of entities may not be registered as shareholders because they are not considered to have a ‘separate legal personality’ – that is to say, they are not separate ‘legal entities’ in their own right. For example, if shares are held by a trust, it is usual for the trustees to be registered as the shareholders – not the trust itself.

Shareholder information will be registered within the company records (such as the Register of Members) and will be filed at Companies House when submitting an application for incorporation and when filing a Confirmation Statement CS01.

For further information about company incorporations, see our earlier article here.

Persons with Significant Control (PSC).

If a shareholder holds more than 25% of shares and/or voting rights in a company, they become registrable as a PSC in most cases.

Once a PSC is identified, their details will need to be entered into the company’s PSC Register. The records held at Companies House should also be updated as and when a shareholder becomes registrable as a PSC.

For further information about PSCs, see our earlier article here.

How Gerald Edelman can help 

Whilst we hope that this article provides a useful summary of the basics of shares, we know that every company is different. If you wish to discuss the shares in your company, please contact our team today.  

Look out for our next article in this series!