Share redesignation is an administrative process that changes shares in a company from one class to another. For companies of all sizes (including start-ups and SMEs), it can help make important structural changes to its ownership structure.
In this post, we will explain what share redesignation is and why companies undertake this process. We’ll also guide you through the process of redesignating your company’s shares, if it’s the right move for you. Let’s get started.
What is share redesignation?
Share redesignation is the process a company limited by shares undertakes to convert shares from one class to another. Doing so changes the rights of those shares, if the rights attached to the new class are different from the old class.
This process is also commonly known as ‘reclassification’ or a ‘conversion’ of shares, and it is governed by section 636 of the Companies Act 2006 and your company’s articles of association.
Why companies redesignate shares
Companies redesignate shares for a number of reasons, such as adjusting the level of control certain shareholders have, or creating a structure that helps incentivise employees. Here are some of the key reasons share redesignations are undertaken:
To adjust control
Some shareholder’s shares might be redesignated into a class that has either enhanced or reduced voting rights, to adjust their overall control of the company. This might be useful if new shareholders are being brought into a new company, and the influence and control of the original shareholders need to be preserved.
For tax planning
Another reason why redesignating shares into other classes might be helpful is because of its potential to help improve tax efficiency. For example, if the shares of different shareholders are redesignated classes that allow for different levels of dividends to be paid to them, there will be greater flexibility as to which shareholders receive dividends, and when.
This could help control the level of dividend an individual shareholder receives at a given moment, to allow them to receive it when it is more tax-efficient or beneficial to pay them.
To assign preferential rights
If one shareholder makes a larger investment into the company than others – for example, you could redesignate that shareholder’s shares into a class that has preferential rights (for example, concerning dividends). Indeed, this is something that investors will often insist upon.
Preferential rights essentially mean the holder(s) of those shares enjoy their rights in preference to the holders of the other class(es). So, if a class has a right to a preferential dividend, then those shareholders will receive their dividends before anybody else.
To reward your employees
Companies will often offer staff an equity stake in the company as part of their incentive package. In such cases, the company may not want the employees to hold the same rights as other shareholders. For example, it might not be appropriate for the employees to be given any voting rights with their shares, since this would mean they would have influence over certain company decisions.
Redesignation is one way of helping to get shares with the appropriate rights to the shareholders. That is, existing shares might be redesignated into a dedicated share class with the desired rights (for example, no voting rights) and then these are transferred onwards to the employee(s) in question.
To attract new investment opportunities
Share redesignation helps reorganise your company’s share capital structure into an appropriate position, in anticipation of future investment.
If or when new shareholders come on board, your company’s share capital structure might need to be adjusted to meet the requirements of new investors. This can be a useful way of accommodating new shareholders, as well as securing new financing to help your company grow.
Typical rights attached to share classes and how they can be varied
As we’ve established, redesignation converts shares from one class into another, which can vary their rights.
There are no set rules for the rights that should be attached to a share class; however, detailed below are examples of the typical rights attached to shares, and the common ways they might be varied when a company has multiple classes of shares.
Voting rights
Shares normally have the right to vote, with one vote being held per share. The number of votes a shareholder has versus the other shareholders in the company helps determine their level of influence.
In the event of a shareholder resolution, a shareholder with voting privileges has the right to influence the matter in question, by voting either for or against the resolution. By contrast, a shareholder with no voting rights is not able to vote on the resolution, and is therefore usually unable to influence the outcome.
Common ways that voting rights can be amended include removing the voting rights altogether, enhancing the voting rights (for example, by increasing the number of votes per share), or restricting exercise of the voting to certain decisions.
Dividend rights
Generally, shares have an equal right to dividends. This means that every share must be paid the same amount as the others when a dividend is paid.
When a company has different classes, those dividend rights can be varied. A common way is to allow for variable dividends between the different classes of shares. This means that shares in one class do not have to be paid the same rate of dividend per share as shares in another class.
Another common way dividend rights can be varied is through the introduction of a preferential dividend, which we touched on earlier. In simple terms, a preferential dividend entitles the holder(s) of the shares to receive their dividends before anyone else in the company.
Capital distribution rights
This refers to the rights of the shareholders to the company’s capital, when it is distributed – for example, when the company is being wound up.
Shares usually have an equal right to capital distribution, which means that the shareholders participate in capital distributions in proportion to their ownership of the company. So, if a shareholder held 50% of the shares in the company, they would be entitled to 50% of any capital distributions.
There are a number of ways capital distributions can be varied when there are multiple share classes in a company.
A common way is to restrict the maximum amount a person can receive during such distributions for the shares. For example, a company might restrict the total amount a person can participate in capital distributions to the total price paid for the shares when they were issued. So, if a shareholder only paid the nominal value of £1.00 when they were issued a share, they would only be entitled to up to that £1.00 for the share, and they would not be entitled to participate in any further capital distributions.
Another way capital distribution rights can be varied is to provide certain shares with a preferential right to capital distributions. Like preferential dividends (that we discussed in the section above), a preferential right to capital distributions means holders participate in those distributions before anybody else.
An example of share redesignation
To put share redesignation into perspective, we’ll use the example of a company with two shareholders, Shareholder 1 and Shareholder 2, who each hold 50 Ordinary shares. These shares hold voting rights.
Over time, Shareholder 1 dedicates more time and funding to the business versus Shareholder 2. For this reason, it is agreed to remove the voting rights of Shareholder 2, so that Shareholder 1 holds all the voting rights, and thus the ultimate influence over the company.
The corresponding share class with no voting rights already exists in the company’s articles – in this case, they are called the “B” Ordinary shares. So, all the company needs to do is to redesignate Shareholder 2’s 50 Ordinary shares into 50 “B” Ordinary shares.
Once the re-designation is complete, the new company share structure will consist of 50 Ordinary shares held by Shareholder 1 and 50 “B” Ordinary shares held by Shareholder 2. Shareholder 2, having had their shares redesignated into the non-voting share class, no longer holds any voting rights.
How to redesignate shares
Before you can start, you need to consult your articles of association to check if:
- It provides for different classes of shares to be issued
- The class you want to redesignate into is provided for; and
- Whether there are any special procedures that need to be carried out to complete the redesignation.
Your articles of association are the principal governing document of your company that outlines the overarching rules of how your company is managed. This document should specify the different classes of shares the company can issue, along with the rights attached to those classes.
1. Obtain shareholders’ approval
If your current articles of association do not provide for the class you wish to redesignate to, you may need to adopt new articles that lay out the specific rights for each of your new share classes.
New articles of association can be adopted by the shareholders using a special resolution. The special resolution can be undertaken either at a general meeting or by a written resolution (please note, that a public limited company is not permitted to use the written resolution method).
For a special resolution to be passed, 75% or more of the eligible votes need to be cast in favour of it. You may also need to obtain separate consent for individual share classes.
The next step is to approve the redesignation of shares itself. This is normally achieved through an ordinary resolution, which requires more than 50% of the eligible votes to be cast in favour of it.
The ordinary resolution handling the redesignation will normally make reference to the following:
- The identity of the shareholder whose shares are to be redesignated
- How many of their shares will be redesignated
- The name of the existing class the shares belong to
- The name of the class the shares are being converted into
2. Update the register of members
The next step is to update your register of members. This is a vital company record that must be maintained at all times and stored at your registered office address (or single alternative inspection location, if you are using one).
The register of members states the person(s) that own the company, together with the details of their ownership. The amended document should reflect the following with respect to redesignation:
- The name and address of the member whose share class has been converted
- The name and nominal value of the new share class
- The date of conversion
- The total number of shares held by the shareholder
3. Notify Companies House
Next, you have 1 month to notify Companies House about changes to your share structure. To do this, you should complete an SH08 form, which confirms:
- Your company number
- Company name
- Date of redesignation
- Existing class of shares and how many are being converted into another class
- New name or designation of the shares
Submit your form via the ‘upload a document’ service, or post it to the appropriate address detailed on the forms.
4. Issue new share certificates
Once share redesignation has been completed, you will then need to issue new share certificates for the shares that have been converted. These share certificates will state the new class the shares belong to.
This should be actioned within 2 months of notifying Companies House.
5. File a confirmation statement
The final step is to file a new confirmation statement with Companies House. This is a document that confirms that your basic company information is correct and up to date and, in this case, confirms the new class(es) of shares held by the shareholder(s).
You can file your statement online via WebFiling as soon as your shares have been redesignated, or when your next confirmation statement is due.
Conclusion
Share redesignation is the process of converting shares from one class to another, thereby helping to make use of different classes of shares.
Converting shares between classes allows you to make use of different rights, make use of tax planning benefits, or position your company appropriately ahead of new investment opportunities.
We hope this guide has helped you understand what share redesignation is, why companies might redesignate shares, and how to redesignate your own share classes.
If you have any comments or questions, please post them below or get in touch with our team.
