By Philip Hayden, 17th July 2018
When deciding on a share structure for an Irish company, there are several different types of share classes that can be included in the share capital depending on the type of shareholders a company has. The shares in a company represent the ownership of the business and a different share class can be used to filter profits in a certain way or alter who has power in a company. The Companies Act 2014 provides that companies should have a Constitution in place that will govern what a company can do. Within this document, a share structure can be outlined to greater accommodate the needs of a company. As the Constitution is a set structure it is always highly recommended that a Shareholders Agreement be put in place to regulate the intricacies of how the share capital should function.
Types of Share Classes
There are various share classes or types available, with some of the most common expanded on below:
This share type is the most common and typically they form the backbone of the shares in any company. As the name would suggest, this share class has ordinary rights and ranks in the middle when it comes to most decisions or dividend in a company. Ordinary share capital is generally issued for cash or non-cash equivalents being invested in a business. Rights can be taken away or altered where needed when it comes to Ordinary shares and different classes within this type are allowed, for example, A-Ordinary or B-Ordinary shares with different powers. Things like voting rights, dividend details or powers within a company can be expressly listed in the Constitution and/or Shareholders Agreement.
Preference and Deferred Shares
When Ordinary shares are already in place a company has the option to put preference or deferred shares into the share structure. Preference sits ahead of Ordinary shares, going first in all cases. This would be designed to streamline decisions, receive dividends first or a preference on winding-up. In many cases, founders of a business or investors who have contributed more to a company would be issued with this share class. This puts the interests of those shareholders ahead of the Ordinary shareholders. As the name would suggest, Deferred Shares act in the opposite way and are placed behind Ordinary shares in order of receiving dividends or on winding-up. Generally, deferred shareholders are silent investors who expect a better return on a smaller investment. While simply listing the name of either share class in the Constitution, the Shareholders Agreement can expand on the functional elements of the shares.
As with the Ordinary share class, Redeemable shares are flexible in their overall rights but have the additional redeemable feature. This allows a company or a shareholder redeem or ‘cash out’ shares for a set value and typically at a set point in time. This share class enables greater regulation of funds invested in the business and provides investors with a more secure platform for return on shares. It must be noted that shares can only be redeemed when a company has enough reserves in the business to do so.
Commonly known as ‘Sweat Equity’, share options make up a portion of the share capital of a business put aside to be issued in the future. These options can contain a variety of powers and rights and are granted when certain conditions are met. Share options are a way of rewarding employees, directors or current shareholders. The reward can be for things like length of service, hitting a target or for general performance. These shares can have various rights attached to them and are often issued over a period of time in tranches or batches. The specific details of when and how they are issued would be governed in a Shareholders Agreement.
A key factor within share options is the opportunity for employees to avail of tax breaks or deferred taxation when taking on shares in a company. The Revenue directly approves three types of programmes for this process.
- Approved Profit Sharing Schemes
- Savings related Share Options
- Key Employee Engagement Programme (KEEP)
Approved Profit Sharing Schemes allow an employer to distribute up to €12,700 per year from the profits of a business in the form of shares to a member of staff. The employee will not be subject to taxation and will be bound to retain the shares for a period of at least three years or they will become subject to taxation on the same.
The idea of savings related share options comes from an employee saving for and purchasing shares in the employer’s company. Once a scheme like this has been approved by Revenue, shares can be purchased in a tax efficient way depending on conditions set out as part of the sale.
The KEEP scheme allows employers to directly remunerate key staff with shares. Once approved, the shares issued to employees will have a deferred taxation put in place. Rather than being charged employee taxes, the shares will be given tax-free at the time but will be subject to capital gains tax when disposed of in the future.
A Golden Share is a type of Ordinary share that is issued to a shareholder to provide control over the composition of the board of a company. In many cases, this share will be issued to a founding shareholder or an investor providing funding. For more information on this share type, please see our earlier blog which provides more details: What is a Golden Share?
For more information on types of share classes, dividends or Shareholders Agreements and the impact any of these have on the share structure of a company, feel free to get in touch with Company Bureau on 01-6461625 or at firstname.lastname@example.org.