Multiple share classes in a Pty Ltd: when and why

Australian Pty Ltd companies can issue more than one class of shares, and most growing companies eventually do. Each class can have different rights to vote, receive dividends, return capital on winding up, or be redeemed by the company. The mechanics are straightforward but the constitution has to be drafted to support the structure, and ASIC lodgements have to reflect each class precisely.

The most common reasons firms set up multiple classes are: distinguishing founder shares from investor shares (founders keep voting control while investors receive preferential dividend access), creating dividend access streams (allowing different shareholders to receive different dividend amounts in the same year), and structuring redeemable preference shares for tax-effective capital management. Each of these has tax implications that should be discussed with a tax adviser before implementing.

For multiple classes to be meaningful, the constitution must define each class explicitly: voting rights, dividend rights, return-of-capital rights on winding up, conversion or redemption rights, and any restrictions on transferability. A constitution that only contemplates ordinary shares cannot host a meaningful preference share class.

The standard constitution included with every CoSec Partners company registration already defines a full set of classes. Alongside ordinary shares it provides A class shares, B to H class shares, and two classes of redeemable preference shares, I class and J class. The table below summarises the rights attached to each.

Read across the table and the uses become clear. A class shares carry a vote and notice of meetings but no dividends, and rank ahead of ordinary and B to H shares for capital. B to H class shares carry no vote and receive only the dividends the directors determine, and with seven separate classes the directors can pay different dividends to different holders, which is how dividend access structures are usually built. I class shares carry a fixed, cumulative, preferential dividend (which, under the standard constitution, ranks ahead of ordinary shares but after any dividend the directors determine for B to H class shares) and are redeemed on their terms of issue, with a vote only in limited cases such as dividends in arrears. J class shares are redeemable, can be converted at the directors’ discretion, and carry no vote or notice unless the directors allow it.

Because these classes sit in the standard constitution, they can be issued when the company is registered, with no separate drafting and no delay to a same-day formation. The terms of issue still need to be settled for each issue, in particular the dividend rate and redemption amount for I class shares. Firms that use their own constitution can register with the classes it defines instead.

When issuing new shares of any class (including a class that already exists), the company must lodge a Form 484 with ASIC within 28 days of the issue. The lodgement must specify the share class code, the number of shares, the issue price, and the new total holdings. ASIC has a defined set of class codes; using a wrong code is a common error and results in a request for amendment.

The four standard share categories are ordinary (full voting and dividend rights), preference (priority on dividends, often with restricted voting), redeemable (the company can redeem the shares on terms fixed when they are issued, but only out of profits or the proceeds of a new share issue), and convertible (can convert into ordinary shares in defined circumstances). Each can be combined: redeemable preference shares are common in investment structures.