Alphabet shares allow UK companies to create different classes of ordinary shares with different dividend, voting and capital rights. They can provide significantly more flexibility than a single class of ordinary shares, but the differences between each class must be properly documented in the company’s articles of association and implemented through the correct corporate procedures. Poorly structured alphabet shares can create shareholder disputes, unlawful dividend risks and unwanted tax consequences.

What are ordinary shares?

A company incorporated with a single class of shares, typically labelled "ordinary shares", must treat every shareholder within that class identically. Dividends, voting rights and any return of capital on a sale or winding up must be applied strictly pro rata to shareholding.

If two shareholders each hold 50% of the ordinary share capital, they receive 50% of any dividend declared, carry 50% of the vote, and share equally in any capital distribution.

This simplicity is an advantage in itself. A single class of ordinary shares is easy to administer, easy for investors and buyers to understand, and rarely gives rise to disputes about entitlement.

It is, however, rigid. It cannot accommodate shareholders who contribute differently, who want different exposure to risk and reward, or who need control and economic benefit to be separated.

What are alphabet shares?

Alphabet shares are not a distinct category recognised by the Companies Act 2006. The term simply describes multiple classes of ordinary share typically labelled A, B, C and so on, each carrying a different bundle of rights over dividends, voting and capital.

The classification is shorthand; the substance lies entirely in what the company's articles of association say each class is entitled to. For more on this, see our article on bespoke articles of association and why companies should review their constitution.

Under section 629 of the Companies Act 2006, shares form a separate class only where the rights attached to them are not, in all respects, uniform with those of another class. That single provision does much of the legal work in this area, and it is where a significant proportion of alphabet share structures fail in practice.

For more on why the company’s constitution needs to reflect its actual ownership and governance arrangements, see our article on bespoke articles of association and why companies should review their constitution.

What are the advantages of alphabet shares?

Used correctly, alphabet shares give a board tools that a single-class structure cannot provide:

• Dividend flexibility – the board can declare a dividend on one class and not another, allowing profit to be routed to particular shareholders without altering the underlying ownership percentages.
• Separation of control and economic interest – founders can retain full voting rights while other shareholders, such as family members, passive investors or early employees, hold shares carrying dividend rights but limited or no vote.
• Tailored capital rights on exit – classes can be structured to reflect different contributions or risk taken by different shareholders, which is particularly relevant where investment or sweat equity was introduced at different points in the company's life.
• A workable alternative to formal option schemes – for businesses that do not qualify for EMI, or where founders want an employee to become a shareholder immediately rather than on exercise of an option, a restricted alphabet share can be a simpler route to genuine equity participation.

These are legitimate commercial reasons, and the structure works well where the rights of each class are clearly thought through from the outset, ideally when the company is set up, rather than retrofitted once a dispute or a tax enquiry is already in motion.

It is worth distinguishing alphabet shares from two related but separate tools.

Preference shares, typically used to protect investors on a funding round rather than to vary rights between existing owners, carry an enhanced or prioritised right to dividends and/or capital.

Redeemable shares, more commonly used to give short-term investors a clean exit route, give the company or the shareholder a right to buy back the shares at a future point.

Alphabet shares can be combined with either feature, but the three concepts serve different commercial purposes and should not be conflated when structuring a cap table.

How do you create alphabet shares correctly?

Creating a valid alphabet share structure is a procedural exercise, not just a drafting one. Three steps are commonly missed:

• Director authority to allot. Under section 551 of the Companies Act 2006, directors need express authority to allot new shares, particularly where the new shares fall outside an existing class. Without it, an allotment may be invalid, even if the commercial intention was clear.
• Disapplication of pre-emption rights. Existing shareholders generally have a statutory right of first refusal on new share issues under section 561 of the Companies Act 2006. Introducing a new class to a subset of shareholders, or to a new joiner, typically requires those pre-emption rights to be disapplied under section 570 or 571, usually by special resolution alongside the amendment to the articles.
• A genuine special resolution. Amending the articles to create or vary a share class requires a special resolution, meaning at least 75% of the votes cast by shareholders entitled to vote. Companies sometimes proceed on the basis of informal agreement between shareholders rather than a properly passed and filed resolution, which leaves the new class open to challenge later.

Missing any one of these steps does not necessarily reverse the share issue, but it does leave the structure vulnerable to challenge, and buyers' lawyers on a future sale will look for exactly this kind of gap during due diligence. For a broader look at the remedies available where shareholder rights are disputed, see actions & remedies in disputes between shareholders.

What are the legal risks of alphabet shares?

Companies frequently convert existing ordinary shares into "A" and "B" shares, or issue new alphabet shares, without amending the articles to specify how dividend, voting and capital rights actually differ between the classes.

Where the only distinction is the label, the shares remain, in law, a single class, and must be treated pro rata regardless of what the share certificate says.

This point was underlined, in a different way than is often assumed, by Gu v Whibberley [2025] EWHC 1816 (Ch).

The case concerned a shareholder who held a distinct class of shares ("F shares") tied to his employment. The company had, by informal agreement, paid him dividends on a pro-rated basis that departed from the equal-treatment provision in its articles and shareholders' agreement; the High Court described this as a "technical infringement" of the governing documents, though by trial the shareholder had conceded that no remedy could flow from it, given the mutual understanding the parties had operated under for several years.

The more significant finding was separate: the company had failed to operate the contractual exit mechanism that should have triggered a buy-out of the shareholder's shares once he resigned as an employee.

The Court held that omission unfairly prejudicial under section 994 of the Companies Act 2006 and ordered the company to buy out his shares at fair value, without a minority discount, and separately ordered the company to continue paying him dividends up to the date of completion of that purchase.

‍The lesson for any alphabet structure that ties a share class to continued employment, a common feature where such a class is used as an alternative to a formal option scheme, is that the buy-back or leaver provisions attached to that class have to be actually operated when the triggering event occurs, not left to an informal understanding between the parties.

For related analysis of how share rights and company documents can give rise to section 994 claims, see our article on interpretation of clauses and unfair prejudice in shareholder disputes.

Where a company has paid dividends on a non-pro-rata basis without the articles properly supporting that distinction, those dividends may be unlawful. Directors who authorise an unlawful dividend can face personal liability to repay it, whether or not they received any benefit from it, and the issue routinely surfaces during buyer due diligence on a sale.

What are the tax risks of alphabet shares?

Alphabet shares are frequently used to route dividends to a spouse, civil partner or family member in a lower tax band.

HMRC's settlements legislation, contained in Part 5, Chapter 5 of the Income Tax (Trading and Other Income) Act 2005, allows income diverted in this way to be taxed as the settlor's income rather than the recipient's, where the donor retains an interest in the settled property.

The leading authority remains Jones v Garnett [2007] UKHL 35, commonly known as Arctic Systems, in which the House of Lords held that the outright gift exception in section 626 ITTOIA 2005 protected a spouse's dividend income, because the shares carried genuine capital and voting rights and were not merely a right to income.

That protection is considerably weaker where the shares in question are dividend-only, carry no vote and have no real economic substance beyond the income stream, precisely the profile of many hastily implemented alphabet structures.

A related risk arises where dividends are paid to an individual in a manner that tracks their personal performance or substitutes for what would otherwise be salary.

Following PA Holdings Ltd v HMRC [2011] EWCA Civ 1414, HMRC can recharacterise such payments as employment income, exposing the company to PAYE and National Insurance liabilities regardless of the "dividend" label attached to them.

The risk is not confined to dividend income during the life of the company.

HMRC also scrutinises alphabet share structures at the point of a sale, where differing rights between classes can affect how consideration is apportioned and, in turn, each shareholder's capital gains tax position.

Where the apportionment of sale proceeds between classes does not follow logically from the rights set out in the articles, that mismatch is a natural focus for enquiry.

Are alphabet shares better than ordinary shares?

Alphabet shares are a legitimate and often valuable feature of UK company law, and in the right circumstances they offer flexibility that a single class of ordinary shares simply cannot match.

The structure's reputation for being informal or low-risk is, however, misplaced.

Its effectiveness depends entirely on the articles of association at the point the classes are created, and on the commercial substance behind any dividend policy that follows.

Companies that treat the letter as the only distinction between classes are exposed on two fronts at once: to a shareholder challenge that the classes were never genuinely separate, and to an HMRC challenge that the dividend was never genuinely independent income.

Barnes Law’s Corporate team advises companies, founders and shareholders on share structures, articles of association, shareholder rights and corporate governance. For more information, please contact our Corporate solicitors in London to discuss how we can support you.

Written by Barnes Law Managing Partner Yulia Barnes.