Most companies have only one class of shares, ordinary shares, but it is possible for even small private companies to have different share classes. Different classes of shares often have different voting, dividend and/or capital rights.
Sometimes this is done to attract a particular investor, e.g. by giving them preference shares. In other cases, shares are given to family members or employees so that dividends may be paid to them. In other instances, the owners of the company may want to restrict the rights attached to such shares, e.g. by making them non-voting, and perhaps by making it possible to take the shares back if circumstances change perhaps by making them redeemable.
How to create Different Classes of Shares
The common examples of classes of shares are ordinary, preference and deferred shares. In some instances, the different classes of shares can further be varied and identified using letters of the alphabet, that is: e.g. ‘A’ ordinary share, ‘B’ ordinary shares. This is done to create some small difference between the classes, e.g. to allow the company to pay different dividends to the holders of the same share classes, or to, or to distinguish between the shares so that different rules apply for share transfers, etc.
The Companies Act No 17 of 2015 contemplates that a company could create more than one class of shares, with different rights attaching to each class. Ideally the articles of association of the Company would govern the creation of the different classes of shares and outline the rights under each class of share. However, a shareholder’s agreement could also create a variation of rights ascribed to different shares, that results to the creation of different share classes.
When issuing shares to employees, considerations must be given to certain issues such as: the ownership interest which is actually being acquired, the fair market value of the shares when they are issued, the mode of payment of share and how the shares be valued on termination of the business arrangement, all these issues should be addressed by the constitutive documents.
Benefits of Class B Shares to Employees
The creation of Class B shares assumes that employees don’t expect to be offered every benefit and perk out there, however, there are amenities if afforded, would offer them greater flexibility, autonomy, and the ability to lead a productive time at the workplace.
Some companies provide motivation by giving star employees lots of responsibility and the independence necessary to prove themselves while others are finding ways to tie star employees into the success of the business. Creating class B shares, is one of the ways a company could motivate its star employees by leveraging the latter method and with desirable effects.
In order to motivate, its star employees, a company may create Class B (or Ordinary class B) shares that give them voting rights and allows them to enjoy the company’s profit but to a lesser extent compared to Class A or (Ordinary class A) shares.
The Class B shares created will allow star employees to benefit and become motivated by, sharing in Company profits and allowing them to participate in company decisions by giving them a vote in Company meeting, for instance:
- Sharing in company profits and dividends.
Inclusion of star employees, manifests in allowing them to share in company profits and assets afforded them by the class B shares. Profit sharing makes the link between work and reward. If you are going to ask the most from your employees, they will expect something in return. Increasingly, pay is not enough. A plan that rewards employees with a share of the fruits of their labor draws a direct connection between work and reward and empowers them to succeed.
Profit sharing also helps create a culture of ownership. When employees are rewarded based on their contributions to the company’s success, employees feel like owners. As owners, employees have more incentive to increase the company’s profitability. However, this strategy will work only if the company and its management create ways for employees to understand the company’s challenges and contribute to the solutions and that, the creation of class B shares settles well.
- Voting Rights
By creating class B shares, the company motivates its employees by allowing them voice through voting in important company decisions. The right to vote on every resolution related to the company cuts ranges from the right to vote in elections for the board of directors to votes on anticipated corporate changes namely, change of corporate endeavor and goals or elemental structural changes.
Numerous resolutions are settled by a display of hands or polls. This will provide every employee, now shareholder, one vote. Now whilst it is important to acknowledge that these employees may cast a vote in decisions or on goals, their votes may have little effect on significant organization issues.
Employers who let employees share in the success of the company know that employees pay back that investment with greater loyalty, more productivity and expanded creative energy. Without doubt, this reflects positively on the company and allows the star employees revamp the brand.
How can we assist you?
At Netsheria International, we have an experienced team of lawyers who can offer you legal assistance in redesigning your articles of association and shareholders’ agreements to create different classes of shares for your business. Please contact us for our services at law@netsheria.com or visit our website at https://netsheria.com/ for more information on our services.
