Among all of the matters that arise in company formations, directors may give little thought to the type of shares that their new company should issue and instead simply issue ordinary shares. Although this is a satisfactory initial situation for most companies, there are others, given appropriate advice, may wish to issue new shares that differ in class.
It is understandable as many companies are incorporated quickly and at the last minute, however the share structure is important factor relevant to a company’s present and future success – particularly when there may be changes in company ownership or profit sharing. Directors who require flexibility in this area may consider issuing so-called alphabet shares.
The term ‘alphabet shares’ refers to the different classes of share that are issued in accordance with letters of the alphabet, such as preference A, preference B and so on. This enables the issuance of shares that carry greater or fewer rights than the ordinary shares of the company. Such a system allows for the payment of assorted rates of dividends to different shareholders, or simply at different times.
Alphabet shares can also be a means of giving different shareholders different voting powers – for example, there may be a wish for only certain shareholders to be able to vote in relation to director firings or appointments. They can also ensure that different preferential rights over capital apply to certain shareholders in the event of the company being wound up. Such shares could be useful if an investor demands greater security as a condition for putting money into the firm.
It should be borne in mind that if a company wishes to issue alphabet shares after incorporation they will face a greater amount of paperwork and administration, with share allotment forms, meetings and company resolutions.
However should the need arise a company may opt to issue alphabet shares at any time. Unless they have the necessary in-house expertise it is preferable to outsource this work to an experienced company secretary and incorporation agent such as London Registrars.