Share Reclassification UK: Process & Class Rights

Overview

Share reclassification is the process of converting existing shares from one class into another, for example turning some of a company's ordinary shares into A ordinary and B ordinary shares, or creating a new class of preference or non-voting shares. It changes the label and the rights attached to those shares going forward.

Variation of class rights is a related but distinct concept: it means altering the rights that already attach to an existing class, such as changing the dividend formula for preference shares or removing a voting right. In practice the two often happen together, because reclassifying shares without setting their new rights would leave the share structure incomplete.

Both actions are governed by the Companies Act 2006 and by any rules in the articles or shareholders' agreement. The level of shareholder approval needed depends on what the articles say and whether existing class rights are being affected, so the starting point is always a careful read of the current constitution.

Key steps

1. Check the articles and any shareholders' agreement. Before anything else, read the current articles of association and any shareholders' agreement in full. These documents set out what share classes exist, what rights attach to them, and what procedure must be followed to create new classes or vary existing rights. If the articles are silent, the default rules in the Companies Act 2006 apply.
2. Decide the new structure and draft the rights. Work out exactly what the new classes should look like. This means setting out voting rights, dividend rights, rights on a return of capital, and any conditions on transfer or redemption. The new rights need to be drafted clearly because ambiguity here causes disputes years later when dividends are declared or the company is sold.
3. Obtain board and shareholder approval. The directors will usually pass a board resolution recommending the reclassification, and the shareholders then need to approve it by the required majority. Where class rights are being varied, separate class consent is generally required, typically a special resolution of the affected class or written consent from holders of at least three quarters in nominal value of that class.
4. Update the articles and internal records. If the reclassification requires changes to the articles, a special resolution is needed to adopt amended articles. The statutory registers, including the register of members and the PSC register where relevant, must be updated to reflect the new share classes and any changes in who holds what.
5. File the required forms at Companies House. Certain filings are triggered by these changes, which can include notice of a variation of class rights, notice of the name or other designation of a class of shares, and a copy of the resolutions passed. Filing deadlines are short, so it is worth diarising them as soon as the resolutions are signed.

Common questions