Alphabet Shares can add flexibility to a company’s share structure. They can also introduce extra legal steps and tax considerations. Many owner-managed limited companies use these shares to tailor dividends and voting power. However, the structure must comply with company law.
What are Alphabet Shares?
Alphabet Shares are different classes of ordinary shares. Companies label each class with a letter of the alphabet. For instance, a company may create:
- A Ordinary Shares
- B Ordinary Shares
- C Ordinary Shares
Each class can carry its own rights. The company sets these rights in its Articles of Association.
Most companies issue only one class of ordinary shares. In this situation, each share carries the same rights. Dividend and voting power follow the same proportion as share ownership.
However, Alphabet Shares allow a company to tailor rights for each class. The company can create:
- Different dividend rights
- Different voting rights
- Different rights to capital on a sale or winding up
- Different transfer restrictions
As a result, the company gains more control over who votes and who receives income. So, a company might structure its shares as follows:
| A Shares | Full voting rights, full dividend rights, full capital rights |
| B Shares | No voting rights, full dividend rights, no capital rights |
| C Shares | Full voting rights, no dividend rights, full capital rights |
The Articles of Association must clearly define these rights. Additionally, the company must follow those rights when declaring and paying dividends.
Difference From Standard Ordinary Shares
Standard Ordinary Shares usually rank equally. Each share carries identical voting and dividend rights. Therefore:
- The company must pay the same dividend per share within that class
- Voting power reflects the percentage of shares held
With Alphabet Shares, the company can separate these outcomes.
For example: A shareholder may hold shares with strong voting power but limited dividend rights. Alternatively, they may hold dividend rights but restricted voting power.
This flexibility allows the company to distribute profits without surrendering control. Equally, it allows founders to retain decision-making authority while rewarding others financially.
Why Do Companies Use Alphabet Shares?
1. Flexible Dividend Payments
Alphabet Shares allow a company to vary dividends between shareholders. So, one shareholder may pay tax at the Basic Rate, while another may pay at the Higher or Additional rate.
The company can declare different dividends for each share class. As a result, shareholders can extract income in a way that better suits their circumstances. The company can also:
- Pay dividends on A Shares but not on B shares
- Pay a higher rate on one class than another
- Reduce dividends for one class in a lean year
- Defer dividends for a passive shareholder
However, the company must have sufficient distribution profits. It must also follow the rights set out in the Articles of Association.
2. Family Business and Succession Planning
Family companies often involve varying levels of involvement. So, one family member may run the business daily, while another may act as a passive investor.
Alphabet shares can support a fair balance of income and control. Additionally, they can assist with succession planning. A company can introduce adult children gradually into ownership. This structure can help when:
- You aim to build long-term family wealth
- You want to provide passive income to relatives
- You wish to keep decision-making with active directors
3. Employee Incentives
Companies often issue shares to reward employees. Alphabet Shares can facilitate this by granting:
- Dividend rights
- Limited voting rights
- Restricted capital rights
This structure can reward performance while protecting founder control. Many companies also include exit provisions.
For example: They may buy back shares when an employee leaves or restrict transfers to third parties.
What Paperwork Do Alphabet Shares Require?
Alphabet Shares depend on properly drafted legal documents. The Articles of Association define the rights attached to each class. Therefore, the company must amend the Articles before issuing new classes. Failure to do so can result in serious issues, including unlawful dividends.
It may also lead to:
- Shareholder disputes
- Difficulties during investor due diligence
- Delays in future company sale
Creating Alphabet Shares at Incorporation
A company can create Alphabet Shares at formation. Standard model articles rarely accommodate multiple share classes. Therefore, many companies adopt bespoke Articles of Association at incorporation.
This approach allows the company to:
- Define each class clearly from the outset
- Set prescribed particulars accurately
- Avoid later restructuring
Creating Alphabet Shares After Incorporation
An existing company can introduce Alphabet Shares at a later stage. Typically, the process requires:
- A special resolution to amend the Articles of Association
- An ordinary resolution to authorise directors to allot shares (where necessary)
- Board minutes and formal share issue documentation
- Companies House filings and statutory register updates
The company should also update any shareholders’ agreement at the same time to ensure consistency. After amending the Articles, the company can issue the new shares. It should then:
- Update the register of members
- Issue share certificates
- Reflect the changes in the next Confirmation Statement
If statutory pre-emption rights apply, the company may need to offer shares to existing shareholders first, unless an exemption applies.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.