Share reclassification is a powerful tool businesses can use to optimise their capital structure, attract new investors, or redefine shareholder rights.
Reclassifying shares allows companies to tailor their equity structure to meet specific needs, such as creating voting and non-voting shares, preferred shares with fixed dividends, or shares with special rights and restrictions. This flexibility can enhance your company’s attractiveness to potential investors, align shareholder interests, and support long-term growth and stability.
Whether you’re a company director looking to restructure share capital, a shareholder interested in changing share classes, or a business aiming to offer different share rights to new investors, our network of experienced corporate lawyers is on hand to support you.
With a deep understanding of corporate law and extensive experience in equity restructuring, they are committed to delivering tailored solutions that meet your specific needs.
Contact us today for expert legal assistance with your share reclassification needs, starting with a free case evaluation and no-obligation quote for the services of a specialist lawyer.
What is share reclassification?
Share reclassification is a process by which a company restructures its share capital to create different classes of shares, each with distinct rights and privileges.
This can involve converting existing shares into new classes or issuing new shares with specific characteristics.
Why might a company consider share reclassification?
Attracting different types of investors
By creating different classes of shares with varying rights and privileges, companies can attract a broader range of investors. For example, some investors may prefer preferred shares while others might be interested in non-voting shares.
Retaining control
Share reclassification allows companies to issue non-voting shares, raising capital without diluting the voting power of existing shareholders. This is particularly beneficial for founders or current owners who wish to retain control over the company’s decisions while bringing in new investors.
By adjusting voting rights across different share classes companies can maintain control within a specific group of shareholders, such as founders or key executives.
Incentivising employees and key stakeholders
Reclassifying shares to create options or restricted stock units for employees can serve as a powerful incentive.
Furthermore, special classes of shares can be used to reward key stakeholders, ensuring their continued support and commitment to the company.
Flexibility in future fundraising
Share reclassification provides flexibility in future fundraising efforts. Companies can issue new classes of shares with terms that are attractive to potential investors, such as convertible preferred shares or shares with specific liquidation preferences.
Different share classes can also be used to structure various investment rounds,m making it easier to manage and prioritise investor interests.
Enhancing strategic partnerships
Share reclassification can facilitate strategic partnerships by issuing shares with specific rights to partners or allies, ensuring that both parties' interests are aligned and protected.
Special share classes can also be tailored to meet the needs of strategic investors who bring more than just capital, such as expertise, market access, or technology.
Simplifying corporate governance
By creating different classes of shares with distinct voting rights, companies can streamline decision-making processes and ensure that key decisions are made by the most relevant stakeholders.
What are the steps involved in reclassifying shares?
Drafting the proposal
The board of directors must first draft a resolution detailing the proposed reclassification, including the new share classes and their respective rights and privileges.
Getting shareholder approval
A general meeting should be held to discuss the share reclassification and vote on the proposal. A special resolution is typically required, which means at least 75% of shareholders must approve the changes.
Amending the articles of association
Once approved, necessary amendments must be made to the company's articles of association to reflect the new share structure.
Regulatory filings and notifications
The amended articles of association and special resolutions should be submitted to Companies House within 15 days of the resolution being passed.
The company's register of members and any other relevant statutory registers should also be updated to reflect the new share classes and their holders.
Issuing new share certificates
Old share certificates should be cancelled and new ones issued to reflect the reclassified shares. Each new certificate should indicate the class and rights of the shares it represents.
Communicating with shareholders
Changes should be communicates to all shareholders and investors, especially updated information regarding their shareholdings and any new rights or obligations.
Any public records or disclosures should also be updated to reflect the new share structure.
What legal documents are needed to reclassify shares?
Documents required for share classification include:
Board resolutions
Notice of general meeting
Special resolution
Resolution to amend articles
Amended articles of association
Reclassification forms
New share certificates
Revised shareholder agreements
Disclosure documents like shareholding statements and notices
Regulatory filings.
At Lawhive, our experienced corporate solicitors are here to assist you with every aspect of share reclassification, from drafting and reviewing legal documents to ensuring regulatory compliance.
Contact us today to discuss your share reclassification needs and learn how we can support you through the process.
How do I propose a share reclassification to my board and shareholders?
A share classification proposal should include:
A rationale explaining the strategic reasons for the reclassification and how it will benefit the company and its shareholders;
Details of the new share classes, including rights, privileges, voting rights, dividend entitlements, etc;
An analysis of how the reclassification will affect the current shareholders and the overall share structure of the company.
What are the tax implications of reclassifying shares?
Capital gains tax for shareholders
If the reclassification of shares results in a significant change in the shares, HMRC may consider it a taxable event. This means shareholders may incur Capital Gains Tax on any gain realised from the reclassification.
That being said, certain reliefs, such as the share reorganisation relief may apply, allowing shareholders to defer CGT until they actually dispose of the new shares.
Income Tax
Changes to the dividend rights associated with reclassified shares can impact the income tax treatment of dividends received by shareholders.
For shares held by employees, changes in share class or rights might trigger income tax or National Insurance Contributions if the reclassification is seen as providing a benefit or remuneration.
Stamp Duty and Stamp Duty Reserve Tax
The reclassification of shares itself typically does not attract stamp duty. However, if the reclassification involves the transfer of shares between parties, stamp duty may be payable at a rate of 0.5% on the consideration paid.
Similarly, Stamp Duty Reserve Tax may apply to electronic transactions involving the transfer of shares.
Corporation Tax for the company
If the reclassification involves issuing new shares, the company needs to consider the corporation tax implications of any costs associated with the issuance.
Adjustments to the share premium account or other reserves as part of the reclassification may have tax implications that need to be carefully managed.
Inheritance Tax considerations
Reclassifying shares can affect their value, which in turn can impact Inheritance Tax calculations. For example, preferred shares with fixed dividends might be valued differently from ordinary shares.
Share reclassification should be structured to maintain eligibility for Business Property Relief, which provides significant IHT benefits for shares in qualifying businesses.
Given the complexity of tax implications associated with share reclassification, it's important to consult with accountants and financial advisors for tailored advice based on the specific circumstances of the company and its shareholders.
How does reclassification affect existing shareholders?
The key ways in which share reclassification can impact existing shareholders include:
Voting power: Reclassification may involve creating new classes of shares with different voting rights that can alter the balance of control within the company;
Influence: Shareholders with existing voting shares may find their influence diluted if new shares with enhanced voting rights are introduced;
Dividend rates: Different classes of shares may have different dividend rates or entitlements;
Payment priority: In the event of limited profits, dividends on preferred shares are typically paid before any dividends on ordinary shares, which could affect the income of ordinary shareholders;
Liquidation preference: In the event of the company being wound up or liquidated, different share classes may have different priorities regarding the distribution of assets;
Conversion rights: Some reclassified shares may come with conversion rights, allowing holders to convert their shares into another class under certain conditions;
Dilution of ownership: Issuing new shares as part of the reclassification can dilute the ownership percentage of existing shareholders. This dilution can affect their proportional stake and influence in the company;
Rights and Restrictions: Reclassified shares might carry new rights that were not present in the original shares, such as enhanced voting rights, dividend entitlements, or specific veto powers.
Reclassifying shares can have significant effects on existing shareholders, impacting their voting rights, dividend entitlements, capital distribution preferences, ownership percentages, and more. As such, companies need to communicate transparently and effectively with shareholders about the changes and how they will be affected.
At Lawhive, our experienced corporate solicitors can guide you through the process of share reclassification, ensuring that the interests of both the company and its shareholders are protected.
Contact us today to discuss your needs and learn how we can assist you with your share reclassification.