Understanding Particulars when creating a new Share Class.
So you’ve decided to create a new Share Class. Whether it’s to issue options or shares, you must explicitly define whether or not the Share Class has rights to Capital, Voting, and Dividends (the Particulars of a Share Class).
If the Share Class will be used to issue options, you’ll need to define the specifics with respect to Dividends and Voting. Options are usually issued over shares that have full rights to capital.
If the new Share Class is being created for an immediate issue of shares, Rights to Capital will also need to be considered in detail.
It’s also best to avoid having these Particulars simply refer back to the Articles of Association, as they should serve as a standalone summary of the share rights. It is advisable to include as much detail of each right in the Particulars so it is clear exactly what rights are attached to a class of shares.
You can define these by making the commercial decisions for:
Voting - Do you want the recipients to have Voting Rights?
Examples include No voting rights (no right to vote) / Full voting rights (full rights to vote) / Pari passu voting rights (voting rights equal to other classes).
Dividends - Do you want the recipients to have Rights to Dividends?
Examples include: No rights to dividends (no rights to dividends) / Full rights to dividends (full rights to dividends) / Pari passu rights to dividends (equal rights to dividends as other classes) / Rights to dividends as a class as defined by the Board from time to time (as decided by Directors).
Capital - Do you want the recipients to have Rights to Capital on a liquidation or winding up?
In the context of a simple Share Class creation for EMI options, the new class may simply have "Full Rights to Capital". This would give the shareholders full rights to capital in the event of a liquidation or winding up, and in the event of an Exit.
It should be noted that Rights to Capital are different to Rights to Proceeds on a Share Sale or Asset Sale (collectively known as an Exit).
If the share class is for an option scheme, and the exercise conditions of the scheme are "Exit only" (i.e. the option holders can only exercise their options when the company goes through an Exit), then by definition the share class must have Rights to Proceeds.
Rights to Capital on a liquidation or winding up, however, may be reserved for the share class held by the founders and key investors.
Oftentimes the company's Articles of Association will state that the proceeds from an Exit will be distributed in the same way when there is a Right to Capital. However, this may not be the case, so you should always consider this scenario.
It’s important to check for any differing class capital rights in your Articles of Association. If you would like to achieve something more complex than this, the class might need to be rigorously defined in your Articles, for which you should seek legal advice.
Please note: The above is a very general outline of how the decision is usually approached in relatively simple cases. If you are trying to achieve something more complex or bespoke, you should seek legal advice as you may have to make changes to your company's Articles of Association.
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