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Proposed Share Structure

Would this share structure achieve the desired objective?

Company has two shareholders (H&W). They are the only directors. H has other job and pays Higher Rate tax; W has no other income outside company. They want W to get any dividends until she reaches the BR threshold, and to share any excess profits equally between them. Would the following descriptions of rights attaching to shares achieve the desired objective with no obviously undesired results?

“A” shares carry the right to dividends, in any UK fiscal year, up the Basic Rate personal tax threshold for that fiscal year, less the applicable personal allowance for that fiscal year.  “A” shares carry no right to any assets on winding up.

Dividends on ”B” shares can only be paid once the maximum dividend on the “A” shares has been declared in any UK fiscal year. “B” shares carry the right to a share of assets on winding up.

I would be very grateful if answers consisting of little more than the word "No" could be avoided. Thanks in advance.

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24th Sep 2017 13:47

Why bother re-writing the Articles? Why not just have simple alphabet shares and leave the shareholders to achieve their desired objectives by the way they choose to vote dividends?

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By chatman
24th Sep 2017 13:52

Hi John. No change to the articles is contemplated; just the alphabet shares suggested above.

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to chatman
24th Sep 2017 14:08

Well you set out a description of share rights, and the place for such descriptions is the articles. If you are not changing the articles then dividends can be voted ad hoc as the shareholders see fit, which must be better all round.

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24th Sep 2017 16:44

It looks complicated. Furthermore it seems that these are not rights attaching to the (ownership of) shares, but of the specific owners. Seems over-thought.

What, for you or your client, is the problem that prevents the standard tactics re. alphabet shares being employed? Not a rhetorical question! I say this because I would have thought that not only current, but also future and changing circumstances, would be catered for.

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By chatman
24th Sep 2017 16:52

Sorry to sound ignorant Andy, but what are the standard tactics re Alphabet shares?

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to chatman
24th Sep 2017 19:49

Multiple share classes,
Dividends declared on the basis of class
Voting rights of classes restricted as appropriate to achieve objectives

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24th Sep 2017 20:18

It's far more complicated than it need be.

Surely you just need equal amounts of A shares and one B share for the wife.

A couple of million C shares for the husband will solve all voting issues without needing to restrict voting rights for anyone.

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26th Sep 2017 00:45

All the answers so far are a bit glib. Following the Arctic Systems and Patmore decisions you are entering a complex area of shares structures being treated as settlements. This forum is not the place pre-empt specialist advice if you are unsure of the position. An earlier case - Young v Pearce [1996] STC 743 - shows how things can go wrong

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By chatman
to Montrose
27th Sep 2017 19:37

Thanks Montrose. In those cases, shares were given to the wives, whereas inn this case, they already each own 50% of the shares, but I take your point about how it can go wrong.

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By chatman
27th Sep 2017 19:59

Thanks everyone. you are obviously right; the simpler approach is much better. Thanks for bearing with me.

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27th Sep 2017 22:17

I agree with most of the above except I would alter the articles to make it clear that dividends are declared to a class of shares.

For me, the model CA06 arts make this sufficiently clear.

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to Kim Jong Un's Hair
28th Sep 2017 09:52

Yes. What folk constantly overlook is that you don't have to vote the same dividend to each class. So one B share may only have one vote but it could have zillions of dividends.

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27th Sep 2017 22:37

Why not leave shares as A and B with usual rights (entitled to dividends, vote, distribution on winding up etc) and cover off the complexities in a shareholders agreement?

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By chatman
to Kent accountant
28th Sep 2017 12:20

What complexities are you thinking of Kent?

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to chatman
28th Sep 2017 19:14

"W to get any dividends until she reaches the BR threshold, and to share any excess profits equally between them."

Although given they are H&W this may not be necessary.

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By chatman
28th Sep 2017 12:19

I understand HMRC have challenged alphabet share arrangements if they appear to be used for remuneration for work or if they are just a gift of a right to income. Are there other common grounds for challenge?

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28th Sep 2017 19:10

Changing the rights of W's shares can qualify as a settlement by H- and the Arctic Systems "defence" is not available in respect of such a settlement.

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By chatman
to Montrose
28th Sep 2017 20:08

If they just issue one new A share to H and one new B share to W, there is no change to the rights of W's shares is there?

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By chatman
28th Sep 2017 20:06

..

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