What are Alphabet Shares?
The term "alphabet shares" is typically used to describe different classes of shares which have been designated a letter (‘A shares’, ‘B shares’, etc.) in order to distinguish between the different rights attached to the shares. The rights will be documented in the company's articles of association or terms of issue and alphabet shares are used for different purposes in different companies.
Alphabet ordinary shares (‘A Ordinary shares’, ‘B Ordinary shares’, etc.) are often used to enable a company to pay dividends at different rates per share to individual shareholders, but they are useful in other ways – for example, they are also used in family companies and joint ventures and other situations where particular rights (e.g. to appoint a director) are given to specific shareholders.
Differences between Alphabet Shares and Ordinary Shares
An ordinary share are the shares which normally constitute a company’s share capital and typically, holders of ordinary shares are only entitled to one vote per share, and they do not have any predetermined dividend amount. An ordinary share represents equity ownership in a company proportionally with all other ordinary shareholders, according to their percentage of ownership in the company.
The only obligation that an ordinary shareholder has, is to pay the price of the share to the company when it is issued. In addition to the shareholder's right to residual profits, they are normally entitled to vote for the company's board members and to receive and approve the company's annual financial statements.
Alphabet shares are just shares of different classes, often set up as 'A' shares, 'B' shares, 'C' shares, as mentioned above. The classes often all have an equal footing; for example, the same voting and rights on winding up. But they may also carry different rights, for instance entitlement to a preferential set dividend or limited rights to vote at general meetings.
Why Offer Alphabet Shares?
Alphabet shares are certainly something to consider if the company is growing and expanding. Dividends are received by the shareholders of a limited company, in proportion to their personal shareholdings. Should there be a need for one shareholder to be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.
Alphabet shares allow freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder.
Alphabet shares are can also be used in conjunction with an Enterprise Management Incentive (EMI) scheme – find out more about that here.
If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Sarah Ward, head of our Corporate team, on 07889 589596 or e-mail Sarah at firstname.lastname@example.org for advice and assistance.