Redesignation of shares: how to convert company shares

A company’s share structure should reflect how the business is run, how profits are shared, and who controls key decisions.

When that structure needs to change, a redesignation of shares allows a UK company to convert existing shares from one class to another, such as converting ordinary shares into alphabet shares. This makes it possible to alter shareholder rights – for example, removing voting power or reshaping dividend entitlements – without issuing new shares.

This guide explains why companies redesignate shares, the legal requirements involved, and the required steps to follow.

What is a redesignation of shares?

A redesignation of shares, also called a reclassification of shares, is the process of converting issued shares from one class to another. For example, you might convert ordinary shares to alphabet shares or ordinary shares to non-voting shares.

To understand what this means in practice, it helps to understand the difference between share classes:

• Ordinary shares are the most common share type, carrying equal voting, dividend, and capital rights.
• Alphabet shares (A shares, B shares, C shares) are subdivisions of ordinary shares that allow different rights for each letter class, commonly used for varying dividend payments.
• Non-voting shares provide dividend and capital rights but no voting power, useful for rewarding employees or family members without diluting control.
• Prescribed particulars are the specific rights attached to each share class, including voting rights, dividend entitlements, and capital distribution rights.

The redesignation procedure changes the classification or ‘type’ of shares without altering their number or nominal value. It simply reassigns shares to a different class, which may carry different rights attached to them.

Why would a company redesignate shares?

Most UK companies form with only ordinary shares, which offer equal rights to voting, dividends, and capital. While this works well for startups and small businesses, it can become restrictive as companies grow and take on multiple shareholders.

• A guide to company shares
• What are my shareholder rights?
• How many shares should I issue when forming a company?

The first step is usually to create new share classes in the company’s articles of association, for example alphabet shares or non-voting shares. From there, redesignation becomes a practical way to move existing shareholders into those new classes as the business develops, restructures, raises investment, or rewards key people.

Here are some specific reasons to redesignate shares:

1. Managing control and voting rights

As your company grows, you may want to bring in new shareholders without sacrificing control over key decisions. Redesignating shares lets you adjust voting rights, so founders or key investors remain in control, even as new people join.

For example, you could convert ordinary shares into different classes with different voting power, or issue non-voting shares to certain shareholders. This is especially common when you’re raising investment but want to stay in control of the business.

2. Optimising dividend payments

Using different share classes gives you greater flexibility in how profits are distributed.

Instead of everyone receiving the same dividend, you can structure your shares so different shareholders receive different dividends based on their role in the business or personal circumstances.

This is often used for tax planning: for example, spreading dividends across family members to make better use of tax-free allowances, or rewarding contributing shareholders more than passive ones.

3. Offering shares without losing control

Shares can be converted into classes that pay dividends to employees, family members, or advisers without giving them voting rights. This allows a company to reward people for their contribution to the business without handing over control of key decisions.

In some cases, redesignation is used as part of a growth share structure. For example, a company may first convert its existing ordinary shares into separate classes with different rights. A new growth share class can then be created for employees or advisers, giving them a stake in the company’s future success without giving them control of the business or a share of its current value.

4. Attracting investors

Receiving investment from venture capitalists (VCs) or angel investors often hinges on them receiving preference shares, which makes your company more attractive. These may offer guaranteed dividend payments or priority on capital distributions if the company winds up.

5. Restructuring for business changes

As shareholders step back from the business, retire, or become less involved day-to-day, you may want to limit their voting rights while allowing them to continue to benefit financially.

6. Planning for succession and inheritance

When a shareholder passes away and their shares transfer to family members through inheritance, you may want to adjust the rights attached to those shares. Redesignation lets you remove or limit voting rights on inherited shares.

7. Preparing for sale or exit

If you’re planning to sell the business or bring in a buyer, restructuring your share classes beforehand can make the transaction smoother and more attractive to potential acquirers.

You might convert shares to create a cleaner capital structure, separate voting control from economic rights, or ensure key team members are properly incentivised to stay with you after the sale.

8. Improving tax efficiency

By assigning different share classes with distinct dividend rights, you can take advantage of individual shareholders’ tax allowances and lower tax rates, potentially reducing overall tax liability across the business.

For example, consider a company with two shareholders, each owning 50%. One already pays a higher-rate income tax, while the other pays at a lower rate. If both receive the same dividend, more of the dividend is taxed by HMRC.

By using different share classes, the company can pay a larger dividend to the lower-taxed shareholder and a smaller one to the higher-taxed shareholder, so more of the company’s profits stay in the business owners’ pockets. This is common for distributing profits among the founding team.

Legal requirements for share reclassification

You can’t redesignate shares on a whim. Under the Companies Act 2006, any reclassification must follow specific legal requirements to be valid and enforceable.

First, your company’s articles of association must allow for more than one share class and permit shares to be converted from one class to another. If they don’t, you will need to amend the articles by passing a special resolution before proceeding. The articles should also set out the rights attached to each share class and explain how conversions can take place.

However, if the redesignation changes the rights attached to an existing class of shares, additional shareholder approval may be required. In these cases, the affected shareholders must usually approve the change separately, and they may have the right to challenge the redesignation if they believe their rights have been unfairly reduced.

All redesignations must be notified to Companies House within one month using form SH08 (Notice of name or other designation of class of shares). Failure to file on time is a criminal offence for which both the company and its officers may be fined.

How to redesignate shares in a UK company

Private companies limited by shares can carry out a redesignation by following a clear, step-by-step procedure:

Step 1: Check your articles of association

Before a company can redesignate shares, the directors must check whether the articles of association allow for multiple share classes and permit shares to be converted from one class into another. If the articles don’t permit this, they’ll need to be amended before any redesignation can take place.

Amending the articles requires a special resolution passed by at least 75% of the shareholders. Once approved, a copy of the resolution and the updated articles must be filed at Companies House within 15 days.

If the articles already support multiple share classes and allow for redesignation, the directors should then check that they:

• Allow shares to be converted or redesignated into another class
• Set out the rights attached to each class
• Explain the procedure for carrying out the redesignation
• Don’t include any restrictions that may prohibit the redesignation

Once these points are confirmed, the company can proceed with redesignating its shares.

Step 2: Pass an ordinary resolution of members

Where the articles allow, this is usually done by passing an ordinary resolution, provided the redesignation does not affect class rights.

You can pass this resolution either in writing, circulated to all shareholders, or at a general meeting where members vote. Some companies include provisions in their articles requiring a higher majority or unanimous agreement, so always check before proceeding.

Step 3: Obtain class shareholder approval (if required)

If the redesignation changes the rights attached to an existing share class – for example, voting rights, dividend rights, or rights to company assets – additional approval is required from the affected shareholders.

Step 4: File form SH08 with Companies House

Upon passing the resolution, the directors must complete form SH08 with the following details:

• Company registration number
• Company name in full
• The date on which the redesignation took place
• The class originally assigned to the share(s)
• The class of share(s) after redesignation

You must file this form at Companies House, either online or by post, within one month of the redesignation. Companies House will record the information on the public register, along with a copy of form SH08.

Step 5: Update your statutory registers

Following the redesignation, update your company’s register of members as soon as possible to reflect the new share classes. This should happen as soon as possible after any redesignation of shares.

If a shareholder’s level of control has changed, you may also need to update their details on the register of people with significant control (PSC register). For example, this could happen if their voting rights or shareholding percentage is affected.

Step 6: Issue new share certificates

New share certificates should be issued to the affected members, to reflect the changes made to their share classes. The same members must also return their original share certificates to the company.

Example: Redesignation in practice

Suppose two co-founding shareholders each hold 50 ordinary shares in a company. Ordinary shares carry voting and dividend rights. One shareholder is stepping back from day-to-day involvement but wants to continue receiving dividends.

The company’s articles allow different share classes, including a class with dividend rights but no voting rights. The shareholders agree to redesignate that shareholder’s ordinary shares into this non-voting class.

Because the redesignation changes the rights attached to the shares – in particular, removing the right to vote – it can only happen with the affected shareholder’s agreement. In practice, this means they can simply refuse if they don’t agree with the change.

Once agreed, the shareholder returns their original share certificate and receives a new certificate for the redesigned shares. The shareholder continues to receive dividends, while the remaining shareholder controls the voting – all without issuing new shares or changing the company’s total share capital.

What to do after you’ve converted your shares

Once you’ve completed the redesignation, use the following checklist to make sure everything is compliant and properly documented:

• First, keep copies of all board minutes, resolutions, and correspondence related to the redesignation in your company records. These documents may be needed for future audits, investment rounds, or if shareholders query the changes.
• Update any shareholders’ agreements or other legal documents that reference the old share structure. Failing to keep these aligned with your actual share classes can create confusion or disputes later.
• If you pay dividends, ensure your accounting systems reflect the new share classes so different dividend rates can be applied correctly. Similarly, update any payroll or tax planning arrangements that depend on the share structure.

From there, consider reviewing your share structure annually to ensure it continues to meet your business needs as circumstances evolve.

Common mistakes when redesignating shares

Understanding the potential challenges of share redesignation helps you plan ahead and avoid complications. Proper preparation from the outset can save you time, money, and legal issues down the line.

Failing to check articles restrictions

Some articles restrict or prohibit certain share redesignations. If you used the model articles for private companies at incorporation, be aware it only provides for ordinary shares, which means amendments are required before you can proceed.

Missing filing deadlines and poor record-keeping

You must file form SH08 within one month of the redesignation. Both the company and its officers can be fined for non-compliance, with daily penalties accumulating for continued breaches.

Failing to update your share register or PSC register properly can cause problems if you later want to raise investment, sell the company, or distribute dividends.

Miscommunicating with shareholders

Not all shareholders may agree with or understand the redesignation. If shareholders feel their rights are being diminished without consultation, they may challenge the process or create friction that damages business relationships.

When to seek professional advice

In many cases, redesignating shares is straightforward. However, it’s worth getting expert advice if the situation is more complex or comes with high stakes. It’s a good idea to speak to a professional in the following situations:

• If you’re unsure how new share classes will affect control or dividends
• If tax planning is one of your main motivations
• If there’s a risk of shareholder disagreement
• If the redesignation forms part of a wider restructure or investment round

However, these are just a few common examples. If you’re unsure or on the fence, it’s worth looking for a second opinion.

Redesignation of shares offers flexibility

Redesignation of shares allows you to adapt your company’s structure by converting existing shares from one class to another.

The process requires checking your articles, obtaining shareholder approval, filing form SH08 with Companies House, and updating your registers. Careful attention to legal requirements is vital to ensure the process is smooth and compliant.

If you’re forming a company or thinking ahead about how your share structure might need to change as you grow, planning your share classes from the outset can make future redesignations smoother.

1st Formations can help you set up your company with the right share structure, keep your filings up to date, and provide compliance support as your business develops.

Legal disclaimer

This article is for general information purposes only and does not constitute legal or tax advice. Share redesignations can have significant legal and tax consequences depending on your company’s specific circumstances. You should seek professional advice before taking any action.