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Share Re-organisations

What is ‘renaming’ or ‘re-designation’ of shares?

The process of converting issued shares from one class or group into another is called re-designation, re-classification, re-naming or converting of shares. It is referred to as share re-designation in the Companies Act 2006, however the process is more usually referred to as share re-classification.

Companies may seek to re-classify shares following a sale or re-organisation of a company or simply for administrative, historical or family reasons with shareholders choosing or needing to hold different classes of shares. A simple example of a re-classification may be where a company has two shareholders, holding equally between them 100 ordinary shares with a nominal value of £1 each. The company then wishes to re-classify those shares into 50 “A” shares and 50 “B” shares.

As the Companies Act 2006 does not specify that a special resolution is required to change the classification of a share, an ordinary resolution is assumed to be sufficient unless the articles require a higher majority. The articles of association must always be checked to see whether they state a specific procedure for converting shares. If the articles do state a particular procedure, that procedure will need to be followed.

In order to comply with section 636 of the Companies Act 2006, form SH08 (notice of name or other designation of class of shares) will need to be filed with Companies House within one month of the conversion having taken place.

Sub-dividing and consolidation shares

Shares must have a monetary value attached to them; this is known as a par or nominal value, e.g. 1p, 10p, £1. This nominal amount will be registered with Companies House when the company is first incorporated and the company cannot issue shares for less than this nominal amount.

A sub-division of share capital means decreasing the par value of each share. Shares of a larger nominal value are split into shares of a smaller nominal amount. For example, one 100p share could be split into ten 10p shares.

A consolidation of share capital means increasing the par value of each share. Therefore shares of a smaller nominal value are combined to become shares of a larger nominal amount. For example, ten shares of 10p each could be consolidated into one share of 100p. A share consolidation reduces the number of shares a company has in issue and each shareholder exchanges a set number of existing shares for a set number of new shares.

Traded public companies will often consolidate or sub-divide shares for market reasons where shares trade at prices that are either too “heavy” or too “light”. This clearly will not be relevant for a SME private company. The reason that a SME might wish to undertake a consolidation or sub-division of its share capital could be for example, as part of a capital reduction process, to eliminate unusual amounts, to eliminate very small shareholdings or as part of a share reorganisation following the departure of a shareholder or in anticipation of the arrival of new shareholders.

The procedure to consolidation or sub-divide shares is governed by sections 618 and 619 of the Companies Act 2006. Firstly a directors’ meeting will need to be convened to recommend an appropriate ordinary resolution to members. A general meeting will then be convened or more likely in a private company, a written resolution circulated to members.

Note that the Companies Act 2006 does not specify the type of resolution required to consolidate or sub-divide share capital, therefore a shareholders’ ordinary resolution is considered sufficient provided there is nothing in the company’s articles either requiring a higher majority or preventing it. You must check the company’s articles of association before considering this procedure. One resolution can be used to authorise both a consolidation and sub-division.

Share certificates and register of members

The register of members should be updated to show details of the new number of shares and their nominal value. All existing share certificates should be recalled, either for amendment or cancellation. New share certificates should then be issued.

The Registrar of Companies must be given notice of any sub-division or consolidation of share capital. Form SH02 should be sent to Companies House within one month of the consolidation or sub-division.

Variation of class rights

Usual examples of where rights attaching to shares tend to differ relate to voting, dividends and rights to capital on a winding up.

So, to use the above example, the 50 “A” and 50 “B” shares will, following the re-classification, each constitute separate classes or groups of shares. However on the basis that all the original 100 ordinary shares had the same rights attaching to them, they will still be considered to have these same rights and liabilities following re-classification unless relevant shareholder consent is sought in order to credit each new class with rights and liabilities that differ from one another.

Therefore if the company wants to differentiate the newly re-classified “A” and “B” shares to allow, for example, the “A” shares greater voting rights than the “B” shares, it will need to obtain relevant class (shareholder) consent in order to do this.

The statutory consent procedure set out in section 630 of the Companies Act 2006 requires either the consent in writing from the holders of at least three-quarters in nominal value of the issued shares of that class, or a special resolution passed at a separate general meeting of the holder(s) of that class sanctioning the variation.

Form SH10 (notice of particulars of variation of rights attached to shares) will also be required to be filed with Companies House within one month from the date on which the variation is made.

When deciding whether a company’s proposed actions will vary class rights, it is necessary to first consider whether the rights given to the class of shares or the class of members in question do, in fact, amount to class rights. If they do, it must then be considered whether the action proposed in relation to the class of shares or the class of members in question will amount to a variation of class rights.

Set procedures must be followed when varying class rights. In addition, the shareholders of a particular class of shares also have statutory rights to object to a variation of class rights.