A company transfers shares between classes administratively via “share redesignation”. It can help startups and SMEs undertake significant structural ownership changes. This blog defines share redesignation and explains why businesses do it.
What is Share Redesignation?
The process of share redesignation allows a company to change its share class. If new class rights differ from existing class rights, doing so alters those shares’ rights. This “reclassification” or “conversion” of shares is governed by Section 636 of the Companies Act of 2006 and your company’s articles of association.
Reasons for Corporate Share Redesign
Companies transfer shares to change owner power or motivate employees. Share redesigns have these key reasons:
To Change Control
Some shareholder shares may be reclassified into a class with more or fewer voting rights to modify their influence over the company. This may help if a new corporation has to retain the founding shareholders’ influence and control.
For Tax Preparation
Reclassifying shares into different classes may improve tax efficiency. If shareholders’ shares are reclassified to reflect different payout amounts, dividends will be distributed more freely.
Honouring Your Workforce
Businesses often give employees stock as incentives. The company may oppose employees acquiring shareholder rights in certain conditions. Employee voting with their shares may not be appropriate because it would give them a say in some business decisions.
Attract New Investment Opportunities.
Share redesign helps realign your company’s share capital structure for future investments. Your company’s share capital structure may need to be altered to accommodate new investors. This can help you attract new shareholders and grow your firm by raising funds.
Capital Distribution Rights
The shareholders can receive their share of the company’s capital at any moment, including during liquidation. Shareholders receive equal capital distribution rights in proportion to their ownership stake in the business. If shareholders owned 50% of the company’s shares, they would receive 50% of capital distributions. Capital distributions might vary when a company has multiple share classes.
Capping share distributions is a standard method. A corporation may limit a person’s capital distribution participation to the full amount paid for the shares at issuance. Thus, if a shareholder only paid £1.00 for the share, they would not be eligible for future capital distributions.
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