We have written before about the use of so-called “alphabet” shares to give different rights to particular shareholders in a company, and in particular the care that must be taken with anti tax avoidance legislation to avoid unpleasant surprises.

What we haven’t seen before is the problem encountered by a company owner in a recent court case brought against him by the holder of “B” shares in his company.

Briefly, Skerritt Consultants Limited is a successful and profitable firm of financial advisers, controlled by a Mr Richard Skerritt.

Between 2005 and 2007 an associate, who was not an employee, bought some shares in the company which were designated “B” shares. They had the same rights as the “A” shares except that in relation to dividends:

“the right of the holder to receive dividends declared by the Company but only to the extent that there are profits available for distribution after the declaration of dividends to which the ordinary ‘A’ shareholders of the Company are entitled and in accordance with the policy in relation to dividends as made and as amended by the Company’s Board of Directors from time to time;”

To make a long story short, over a period of several years very substantial dividends were declared on the “A” shares and none on the “B” shares. The “B” shareholder concluded that this was unfair, and the matter ended up in the High Court, which agreed.

It was held that the failure to declare dividends on the “B” shares was prejudicial; the directors had failed in their duty to consider the rights of all shareholders; and the shareholder’s claim was upheld.

So another reason to take care if creating alphabet shares – set up a clear dividend policy at the outset and obtain the subscribers’ agreement to it.

And finally, don’t forget that if the shares are to qualify for entrepreneurs relief, they will need to meet the conditions in the legislation, as amended in the Finance Act 2019 – broadly they will need to have 5% of the voting rights and either be entitled to at least 5% of the dividends or 5% of the proceeds on a sale or winding up

Background notes

Despite the dividend tax, it is still usually beneficial for corporate business owners to pay themselves via dividends rather than salary.

Many also choose to extend share ownership to family members or key staff, and pay dividends to them too.

However this may deny them flexibility in the dividends they pay to themselves; they don’t always want all shareholders to receive equal amounts. Rights to vote, or participate in a sale or winding up, may also vary.

Typically this is dealt with by creating different classes of shares, denominated A, B and C etc shares – hence “alphabet” shares, as they are commonly described.