Understanding Share Classes in Family Investment Companies
Why do share classes matter in a FIC?
In the short video attached, I explore one of the most fundamental aspects of these structures: the types of shares you may find in a FIC.
Just like any other company, the shares allotted by a FIC represent a bundle of rights and obligations for their holders. These rights can be tailored to suit individual recipients, offering flexibility to meet family and tax planning objectives. As assets, the shares form part of the personal estate of the individual shareholders, and so will be subject to inheritance tax where applicable.
Typical rights which shares carry include:
- Voting rights;
- Dividend rights; and
- Capital rights – the entitlement to a share of proceeds on a solvent winding-up or sale of the company.
Common Share Classes in FICs
FICs often use a wide range of share classes, each designed to achieve specific goals. Here are some of the most frequently used:
1. Ordinary Shares
Ordinary shares typically rank pro rata for capital entitlement. These may be sub-divided into multiple classes, sometimes referred to as ‘alphabet shares’, allowing dividend rights to be tailored for each family member while maintaining equal capital rights.
2. Growth Shares
Growth shares only participate in the company’s capital above a specified threshold. They are often used where founders want their holders to benefit from future growth without gifting existing value upfront - commonly for tax planning purposes.
3. Freezer Shares
The opposite of growth shares, freezer shares participate in capital up to a prescribed value only. Founders may use these to avoid future growth increasing their taxable estate.
4. Shares Excluding Capital and Income Rights
These shares carry no economic rights but may retain voting or other rights. They often include entrenched provisions preventing changes without unanimous consent, helping mitigate against arguments that these shares should have an enhanced value because their rights can be changed due to the votes they carry.
5. Redeemable Shares
Redeemable shares allow excess profits to be returned to shareholders and often carry preferential rights to capital over other share classes. These can be used as an alternative to loans into the FIC.
Tailoring Share Rights for Your Goals
The examples above are not exhaustive. FICs offer significant flexibility, and we work closely with clients and their advisers to design bespoke share structures that reflect their objectives and are as future-proof as possible.
Key Takeaway
Share rights form the foundation for how value and control pass within a FIC. It is essential that these rights and classes align with your long-term goals.
For more insights on FICs, please keep an eye out for other videos and articles in the FIC Files series.
