Dr James, 0s:

Alphabet shares are something that we need to know about as dentists because, of course, they're relevant to company structure, which is of course useful to know whenever it comes to deciding how we're going to structure our dental practices or certainly any other businesses that we might hold long term. And that's why I'm joined today by Mr. Ray Goodman of Ecuador. We're going to be talking about alphabet shares, what they are, how we can use them, what we need to know in order to get the most out of them, and how we can stay safe out there whenever it comes to our business transactions. Looking forward to this podcast as ever. As ever, you can claim your CPD for this episode within the official Dentists who invest Smart Money Members Club. Smart Money Members Club also includes multiple mini courses and webinar series on finance for dentists, including how to become as tax efficient as possible as well as understanding investing. All of this content counts as verifiable CPD, and you can download your certificates there and then upon completion of each lesson. In addition to this, we also include a whopping 10% discount on your dental indemnity and a 5% discount on lab bills for dental principals, amongst other perks and discounts for members. Please use the link in the description to claim your verifiable CPD for this episode. Welcome to this slightly impromptu live broadcast by myself and Mr. Ray Goodman of Acuity Law. We're here today to talk about something that confuses the absolute heck out of Dennis, probably because no one ever really explained it to us and we never had the opportunity to learn. So we're here to write that wrong, so to speak, today, by discussing alphabet shares, company structure, and shareholders agreements, which is hyper relevant to us dentists and our business dealings and, of course, our dental practice and other business interests that we might hold. Ray, do you think that's a good intro? If you're happy, should we jump straight in?

Ray, 1m 47s:

That's absolutely fine, James.

Dr James, 1m 49s:

Brilliant. So Ray has Ray has pres created a presentation on this topic today. So Ray's going to be sharing his screen any moment now. Just while Ray is getting that up, there will of course be two channels that people will be listening to this content on. It'll either be on the Dennis Invest Facebook group, the video uh itself, or as well as that, uh it'll be on the Dentists Who Invest podcast platform. So we're gonna do our very best to be as descriptive as possible visually of the slides. If you can't see the slides for whatever reason and you'd like to, the video is gonna be on the Dentists Who Invest Facebook group. Cool. All right, brilliant. So we can go ahead and jump straight in. I see Ray has got his presentation up on the screen. This stage is yours, Ray.

Ray, 2m 29s:

All right, thanks, James, and uh welcome everybody um to today's session on alphabet shares for um dental companies. Um in this episode, we're going to break down what alphabet shares are, why they exist under UK company law, uh, and how they're actually used in real dental businesses, particularly groups that own multiple practices. It's it's practical, not academic. Um, and everything we cover today is taken from structures that that you can actually uh see in real transactions. Um so um here's what we're gonna cover. Um, firstly, we're going to explain what alphabet shares are in plain English. Then we'll look at the UK legal framework, especially articles of association and shareholders agreements. Uh, and then finally, we'll walk through worked examples uh showing how uh dental corporates actually use alphabet shares in practice. Now, I know alphabet shares is not a uh uh a term that is uh used every day by by most dentists, but it is something that that a lot of you will have heard of. Um perhaps some uh some of your accountants may have talked about it and suggested it. Um and often people, you know, it's a bit of a mystery to dentists. So I'm not going to go into any great academic detail. Um we don't need to do that at this stage, but just to give you what the possibilities are, what they are, and uh why they're used. So, firstly, what are alphabet shares? Um, well, simply alphabet shares are different classes of shares uh within the same company, um, usually named A shares, B shares, C shares, etc., hence why they're called alphabet shares, um, and so on. They don't have to be called A, B, and C shares or E, F and G shares. Um, you can, if you want, call them anything you like. You could call them class one, class two, class three, but they tend to be um A, B, and C shares, or D, E and F shares, or what whatever. And it's just a way of identifying the different classes of shares that have different rights. Um, and they're generally used in very broad terms, and we'll look at that in a bit more detail in a moment, uh, to tailor control and the economics um of the the company. So, firstly, um why use them? Why why do companies have alphabet shares? Well, in general terms, it allows you uh control without full ownership. Um and it's that they use to solve very real problems. Founders may, for example, want to raise money but retain control. Key managers may need equity incentives, and investors may want financial returns without operational involvement. And alphabet shares let you separate economic reward from decision-making power, and that's the key thing theme running through this. So, for example, um, if um if a dentist wants to sell part of his practice or grant shares effectively in that practice, but doesn't want to grant give away full ownership, this is a possible way of retaining um certain aspects of troll control, but perhaps not others. Um it in it's it's it's a vehicle that enables um dentists uh to attract investors. Um it's it's a way of possibly rewarding management, uh, it's a way of possibly managing succession uh of the ownership of the company, or to distribute shares amongst family. For example, in relation to the last one, um, some people who incorporate their practices, i.e., transfer it into a limited company, um, do so uh wholly or partly so that they can shed, they can spread the shares around amongst their family, um, as perhaps part of inheritance tax planning, uh, or perhaps simply to reduce the income tax bill and utilize the annual uh allowances for for other members of family, you know, sons, daughters, etc. But perhaps, whilst wanting to uh to utilize those benefits, wants to retain the control of the company and the running of the practice. Uh and this is a way of possibly doing that. So the UK legal framework um is set out in the Companies Act 2006, and the Act allows companies to issue multiple classes of shares, but insists on clarity and fairness. Um so if you create different classes of shares, the rights attached to them must be clearly documented and properly approved. Uh and you can't be casual about this because the law takes share rights uh very seriously. And the rights are generally set out in the Articles of Association, which is, if you like, the company's constitution. Um the Companies Act 2006 actually sets out in one of its annexes, and we'll have a quick look at that in a moment, um, a specimen form of articles, which in reality the vast majority of UK private companies adopt. And they used to be called table A articles. From 2006, they're called the model articles. And if you don't uh make any changes to them, that is the uh form of articles that will apply to your company. So often when when uh lawyers or accountants form new companies for clients, dentists or otherwise, they'll either leave the articles as they are, or which is more general, they'll make specific changes to the um to the model articles. Of course, in some circumstances, we'll draft completely new articles. There's no obligation to adopt the model articles, it's just um easy and and and effective. And and most of the terms in the model articles fit the majority of sort of standard UK companies. But if you want to start changing share classes, adding different shares, then um we would either alter the uh model articles or produce completely new articles. So, articles. Um critical document, as I said, it's the company's um actual constitution, sets out um all the rules and regulations in relation to the uh constitution and and and and the uh compliance of the company. Uh and within that the share classes will be defined. Um so if you've got alphabet shares, all of the details regarding those different classes of shares will be contained in the articles of association. If you've already got a company and then you want to adopt this type of structure with with alphabet shares, different classes of shares, then the orartical amending. Uh not a very complex procedure, but has to be done by somebody who knows what what they're doing. In general terms, it normally requires um a special resolution to amend the articles, um, and that will require a majority of 75% of the shareholders. If you've got different classes of share and you plan to change uh the class rights, i.e. the rights of that particular class, then 75% of the holders of that class uh have to consent. So you have to give it some thought how you structure this before you before you go into this sort of structure, because further down the line, if uh an event happens that requires you to change that structure or dis or dispose of those shares, um, it can become more complex. And always remember that the articles of association are a public document. Um, they are available for anybody to see uh by searching the record of the company at company's house, which uh anybody can do. So what are the what must articles contain? Well, um, when a company's got multiple share classes, the articles must specify the voting rights. Uh, how much how many votes each share holds. Now, you would think that every share has a has has a has one vote. That's not the case. You can stipulate that the A shares have three votes, five votes, ten votes, and the B shares hold one vote. You can also have non-voting shares. So you may want, um, as a principal, you may decide to uh retain all of the voting shares, but grant other classes of shares to your family or investors, which give them rights to participate in the profits, uh, to receive dividends, and rights to participate if the company's wound up. Um, you could also add uh provisions as to what happens if the company's sold. Uh, there are things called um drag-along rights and tag-along rights, um, which um enable um one class of shareholder, perhaps those with the voting shares, to drag along all of the other shareholders if the um voting shareholders decide to dispose of the company. So you you you you avoid a situation where perhaps non-voting shareholders could block um a deal that you, as principal, have decided is the right thing for you and for the company. Um the next thing that that will be set out in the articles would be the dividend rights. Not all shares, as I've just said, not all shares would necessarily participate at all in dividends. And others may have different rights to receive dividends in different circumstances. So you can, for example, have preference shares. They would have a preferential dividend before the non-preferential shares. So if you've made, say, a hundred thousand pounds profit and you've got a class of preferential shareholders uh that have a right to uh participate in the first hundred thousand pounds worth of shares, sorry, uh of profits, then they are eligible to receive that first hundred thousand pounds of profits before the non-voting, the sorry, the non-participating shares uh receive anything. Um capital rights. Well, capital rights are what happens on a sale or winding up of the company. Again, I've seen companies with with uh classes of shares that don't participate at all in the profits, um, aren't entitled to receive dividends, but are preferential in terms of winding up. Now, those shares could also be um could also bear a coupon. So you they could um not have any rights to participate in profits, uh i.e. receive dividends, but they may be entitled to a fixed coupon each year like interest. Um it's not technically interest, but it's effectively the same thing. So they may be entitled to a a 5% um preferential payment each year um before they participate, before any of the dividends and before they participate in dividends. And you can get fairly complex structures where different shares uh are entitled to preferential payments either of a of a fixed uh coupon or preferential um uh participation in profits up to a certain level, and then another share of another class of shares kick in after that, and then the first class kick in um after a further uh uh uh ceiling has been uh reached. So it can get fairly complicated. Um and and finally, class protections. Well, class protections is uh a reference to protections um of the rights of minority shareholders. The Companies Act does have provisions in that protect minority shareholders from being uh effectively um abused by majority shareholders. Um it that it does provide provisions that if um the majority is being unfair um and unreasonable to minorities, that um that they can have a right to petition the court. Um but but it's far better rather than get to that situation to make sure that any any required protections are enshrined in the articles of association to avoid any disputes of that of that length. Um so that is broadly what articles will uh will contain. Now, this is just a snapshot of the index to the model articles which are annexed to um the Companies Act 2006, and you can see without spending too much time on it, it sets out um directors' powers and responsibilities, um, decision making, how the directors are to conduct the process of decision making, um, appointment of directors, and then uh shares and distributions. Sorry, I've just uh skipped forward. Um and all the rules can all the rules relating to how the uh to the different types of shares and how the company is to be run um and uh and achieve compliance um are to be conducted. Uh this isn't an exhaustive uh index, it's part of the index, but it's just there to give you a flavor of the sort of things that will be in your articles of association. If you've already got a limited company, you will your company will have articles of association, whether you've ever seen them or read them or not. Uh and if you're curious, you can go on if you haven't got a copy or um you can get a copy from your accountants or lawyers, but you can also go on to Company's House and do a search. You do um a beat that there is a free search facility now on Company's House Direct. You can read the articles. Um, I don't know that many of you would want to do it. If any of you are insomniacs, it's probably a great way of getting yourself to sleep at night. Um, but otherwise, if you've got any queries, speak to uh speak to your accountants or speak to uh uh uh suitably qualified uh corporate lawyers. So um what happens if you want to change your share classes? So let's assume you've got a company um it's got broadly standard um um uh articles um as per the the the the the the um the standard articles. Um and as I said before, we want to change the situation from having say a a 100 pound share capital of one pound A ordinary shares, and we want to create some new uh uh classes of shares. Um well the first thing is as you've probably gathered, you can't just change them by agreeing uh with with your shareholders in the pub. Um introducing new share classes or changing existing rights will normally require a special resolution, and as I've already said, that's a 75% uh resolution of all of the shareholders if there's only one share class, or if you're changing the class rights of a particular share um uh share class, then you'll need 75% of the holders of those shares. Now, again, there are certain circumstances where you might in your articles um change that and make provisions that to change um to change the rights of a particular type of share or to change rights in a particular type of way, um, there is a different process, and you might need a hundred percent or or fifty percent. Um at the end of the day, it's your company. Um, and it's a matter for the directors uh and the shareholders to decide how that company is to operate and what uh steps are to be taken and what what the articles are to say. There are some um provisions which which you can't change uh because they would fly in the face of the provisions of the Companies Act. So overall, before taking any such steps, you need to get proper advice. Um we at Acuity have have a whole team that that deal with this sort of thing. Um we have created many of the structures for a lot of the bigger corporates. Um we act for several of the larger corporate uh uh dental providers uh and have created the structures for them. And any of them, uh any of you who have uh sold practices to uh some of the bigger corporates uh will will know that some of them have quite complex share structures to allow them, as part of their acquisition policy, to issue uh different classes of shares to the sellers to enable those sellers to get additional consideration if they hit certain targets. It could be targets as to turnover, it could be targets as to profit. Um uh they also um may include provisions. I know the old Dentex um uh share structure, which which which I did many, many transactions on and were very familiar with uh super complex uh deal uh documents. This was the the old Dentex uh uh the old Dentex setter before the uh uh they merged with uh Portman. It's far more simple now. But the old structure had all different types of share, um, which had all sorts of different types of of uh of writing. And and their documents were very, very complex. But in order, if you decide you wanted to change your share uh structure uh to include different classes of alphabet shares, then this is what you have to do. Generally, a special resolution, i.e., a 75% majority of voting shares. Now we talked about articles, and the articles do set out the the um uh the constitutional principles of the company. Um having said that, um, if you are going to have a uh a situation where you've got more than one class of shareholder, um, or in fact, even if you've just got more than one shareholder, then it's almost always advisable to also have a shareholders' agreement. Um, and that sits alongside uh the share the articles. It's not a legal requirement to have a shareholders' agreement, as it is with articles, um, but it is best practice. Uh, in the same way as if you are not a limited company and you are in a partnership or an expense sharing agreement, um, you would always be best advised to have either an expense sharing uh agreement if it's an expense share or a partnership agreement if you're a partnership, to set out more of the day-to-day running uh uh principles of the company. So a shareholders' agreement is not a statutory requirement, it's a private contract. And it sets out the commercial terms um agreed between the parties. So whereas the articles define the legal rights, the shareholders' agreement uh more defines how shareholders actually uh behave um between themselves, and it's very much more a commercial uh document. It is possible that some of the of the uh principles in the shareholders' agreement will cross over um into uh the articles. And there are some terms that could be in the articles or they could be in the shareholders' agreement. Uh it's important in those circumstances to make sure that you don't have conflicting terms in the articles and the shareholders' agreement. Uh, and I can tell you that I have seen that on more than one occasion. Uh and it uh and on occasion, uh, I've seen it in very complex um corporate structures on some of the big uh dental corporates, when in fact um their their articles and the share structures um contradict each other. Um and um I I won't mention which companies it is, but I have pointed that out to their lawyers um and been told, yeah, we know, but we can't change them because um there was another there's another firm of lawyers that deals with the uh the the articles and we do with the shelves agreements and um and um just a silly situation which should never happen.

Dr James, 25m 3s:

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Ray, 26m 56s:

Good question. Um they are a uh a statutory um uh uh document filed at the company's house. Um and I I I I I I I would think that uh in the absence of agreement the articles would take precedent. Okay. Um it it it's actually is it it may be that there's a provision in the shareholders agreement that says that in the in in the event of a conflict between the articles and the shareholders agreement, that the shareholders agreement would take precedence. But it depends every every company has to be looked at separately. Um but but but the main message is yeah, don't make sure that doesn't happen, because you just you know you've you you're just causing problems storing up a potential problem further down the line. And if you need to um rely on one of the principles that that is conflicted, you've got a problem. Um but it's a good question, James. Thanks.

Dr James, 27m 58s:

Yeah, curious, just curious, just curious. Thanks for clearing that.

Ray, 28m 1s:

No, it's an excellent, excellent um question. So um key shareholders agreement uh clauses. Um in dental corporates, um, shareholders' agreements usually cover things like transfers. Um, what happens on the in the event of a transfer? So say for simplicity, we've got two shareholders, a shareholder and b shareholder, each with their own rights. Um one shareholder decides that he wants to sell his shares to um a third party. What happens then? Well, normally, um, if it's not in the sometimes it's in the articles, but if not, it can be in the shareholders' agreement. And the usual the usual provision you would put in would be subject to if this is agreed between the shareholders, that if one wants to sell, then he first has to offer it to the continuing shareholder. And then if that shareholder doesn't want to buy, then um the the first the the the the the the selling shareholder can offer it to third parties. Um there will be uh provisions as to how those shares are to be valued, if there's to be a sale, i.e. if um if the shareholders agreement or the articles provide that uh there are what's known as preemption rights, i.e., the the the the other class of shareholders have the right of first refusal, then there needs to be a mechanism to decide what the figure is, what they're worth. Uh and usually we provide for um each party perhaps to either a joint appointment of a joint valuer, perhaps uh a named valuer like Christie's or Frank Taylor's, um, or provision for uh a valuation by the company's accountants, or uh each party to appoint a valuer and in default of agreement for one to be selected by the president of um the BDA for the time being. Lots of different ways to skin that cap. But the the important thing is we have a uh a defined process to uh agree uh the valuation on on sale. Otherwise, you can have huge disputes over what the shares are actually worth. Obviously, the seller is going to argue that they're worth more, and the buyer is gonna say is gonna raise article, uh, is gonna raise all whatever um arguments that he can. For example, um if the uh if one if if if the continuing shareholder is a my is a um minority share is a majority shareholder and the minority shareholder is being offered, um, there's a there's a potential argument to say, well, actually, that a minority shareholding is worth less because it's a minority and doesn't confer control. Um so that is something that perhaps could would be dealt with in the shareholders' agreement to say that no discount will be given um for minority holdings um or other, you know, or or it could be say that the the the a minority holding would be discounted, um, or you could remain silent and then it's a matter of argument. But the more you can get pinned down when you're uh constructing your your your corporate uh uh uh structure, your shareholders' agreement and and the articles, the better. Um in terms of board control, who controls the board? Who's going to be chairman? Um, is there going to be a chairman? Um are all decisions to be made on a simple majority of directors? Um, does ownership of a particular class of share given automatically uh uh uh uh a director or more than one director on the board? So this is uh an area where you can control how the board is made of what happens if somebody leaves or says, for example, if somebody uh ceases to become a shareholder, they automatically have been uh have designed to be mindful in terms of the board constitution of a limited company, um, of the terms of the Dentists Act, which say anybody can own shares in a dental corporate. Um, you don't have to be a dentist to own shares, and you don't even have to have a dentist on um uh uh as a uh to to hold shares. So you all the shares could be held by non-dentists, and you don't even have to be a DCP dental care professional. The provision in the Dentists Act says that a dental uh limited company, a dental corporate, cannot have a minority of dentally qualified uh persons as directors. So if you're a sole director, if you've only got one director, that director has to be a DCP. If you've got more than one, you can have uh half of them as DCPs and half of them not, because then it's not a minority. But you can't have more non-DCPs than DCPs. Uh, and that is often misunderstood, uh, including um, for example, by the GDC, um, who at one stage, and I haven't checked recently whether it's been changed, said that that a dental corporate has to have a majority of dentally qualified uh uh persons as directors. That's not correct. Uh it's the other way around. You can't have a minority. So you can have equality, but you can't have minority. And the final thing in terms of uh key shareholder agreement clauses is exit rights. We touched on this a little bit before. What happens if somebody wants to leave? And also what happens if somebody dies? What happens to their shares? So there are two terms that are often used in terms generally, actually, these the the exit rights would be dealt with in the articles. And there are two things that are that are normally in the articles provisions as to the procedure on the transfer of a share, which uh relates to the situation where somebody decides they want to sell. Uh, and the other, uh, what happens on the transmission of a share? Transmission referring to the situation where somebody dies and the shares are transmitted rather than transferred in accordance with that person's uh will or uh the administration of their estate.

Dr James, 35m 8s:

And and Ray, just a quick question. What is the advantage of having these things outlined in the shareholders' agreement versus the articles of association?

Ray, 35m 18s:

Um it's a it it it's a moot point. Um as I said, uh the shareholders' agreements tend to deal more with the day-to-day management of the company, um, but can include um these things that we've just uh spoken about. Um having said that, the articles can also deal with most, if not all, of those things. And what tends to happen is that the articles tend to deal with the big things like um transfers, um valuation, um board control. But if they don't, rather than changing the articles, often it's easier if you just when forming the company, you you buy the effectively a company off the shelf, which you can do online in about five minutes, and it used to cost 300 quid, uh, you can now do it for about 10 pounds, um, and you get the company with the standard articles of association. Rather than starting to do um passing resolutions and and and uh which then have to be filed at the company's house, and you have to reprint the articles with in the amended form, sometimes just as a matter of convenience, it can be uh easier just to uh include those things in the shareholders agreement. I see. But I mean we yeah, we we we we we could talk about this the particular question for for for you know for for an hour or two because there are different opinions. Uh another view would be well, a shareholders agreement is a contractual document between the parties, whereas articles of association are actually a statutory um document. And one what once created or filed at Company's house, they're a matter of public record, and anyone can see them. So um there's a day, I suppose there's a slight danger if you muck up your shareholders' agreement and it's not clear um or for for for any reason there are uh uh contractual questions over its enforceability, um, that there's a slightly greater risk of that with a with shareholders' agreement than there are with articles. Having said that, a shareholders agreement is a private document between the parties, and you may not want to see things like dividend policy um or or a basis of valuation or who does what on a day-to-day basis within the company um on a public document. You may want to keep those things confidential between the shareholders, makes complete sense. Which would be a good reason to put them in the shareholders agreement rather than the articles.

Dr James, 38m 12s:

Makes complete sense. Yeah, I was just trying to figure out what's the advantage, I guess.

Ray, 38m 16s:

Yeah, that the the the the there is no hard and fast rule. There are a few things that have to go and would also always go in the articles. The articles have to contain certain uh things broadly in line with the things that we did that that we mentioned when we spoke to the articles. But you saw Bot from the just from the index of the standard articles, there's a lot of stuff in there. Um and the Companies Act provide that a lot of stuff, a lot of that stuff has to be in the articles. So the key thing is to make sure that you don't have a conflict between shareholders' agreement and and and articles. And in drafting the shareholders' agreement, you would normally have a clause at the end to say that in the event of any conflict, in case you've created something by accident, which one prevails?

Dr James, 39m 7s:

Nice, okay, got it.

Ray, 39m 9s:

To avoid that issue. So um I think we've got now a fairly um broad understanding of of uh of what it's about, what it what what alphabet shares are. So why would you uh why would you use alphabet shares and why why particularly do the larger dental groups, not only the larger ones, but but particularly larger uh groups use alphabet shares? Um you almost always uh find different classes of shares in the larger um corporates. Um because you often have founding dentists, you have associate clinicians, you have non-clinical management, and you can have external investors, all with different priorities. The external investors are in there not because they want to run dental practices per se, but they're in there for as an investment. They want to see returns, and they may say, right, we we we we will uh uh invest X million pounds in this company, but we want a preferential dividend, which is paid before anybody else gets anything out. We want a coupon on our on our uh investment. So we say, right, we we want three, we're gonna have um for for for our million pound investment, we're gonna have half a million pound in um uh in cumulative uh preference shares that have a preferred dividend of five percent. Um, and then they participate along with the uh uh the B shares, which are the ones that are held by um the original. Uh and then there could be other classes of shares which they issue to sellers um to reward to give them additional incentive on top of the the the the seller certain targets they get issue um through through through a shit through a class of share. Um as we said, external investors, it's a it's a it's an ideal way of rewarding external investors who can limit their risk by by um by by taking preferential um dividends or or a coupon. Um and need for control. Well, um it may well be that the uh the selling or the existing principles, uh whilst they're happy to have perhaps venture capital money invested in the practice to enable them to expand and acquire more practices, they um they want to retain control of the business and therefore they would retain voting control, or perhaps just voting control on clinical issues. There's no hard and fast rule here, James. You can basically create your own structure. Um, and and you know, we as acuity, I know, have have created very different and and quite novel structures for a number of the larger corporates that uh that that are uh out there acquiring today. Um so let's look at some uh uh uh um quick examples. So this slide deals with a situation where you've uh um where founders want to raise capital but they want to retain strategic and clinic clinic and control. So that they may hold a class of shares with enhanced voting rights, um, and the investors receive shares with standing votes but prefer but preferential economic returns, a little bit like I was just explaining. Um so the investors are protected financially, but the founders retain control over the direction of the group. Uh, and that's a very um private equity friendly structure. Um I was going to say, but I've already said it that here um pure investors can be given a re could could be given redeemable preference shares um or fixed uh coupon shares um uh and participating shares. It it's it's a real sort of fruit salad. You can you you can create you can create the structure that works for your business at that point. So if you're bringing in external investors, you can the There are ways of retaining control, there are ways of giving specific areas of control and different ways of controlling um how the profits are distributed. Example two is more uh designed for clinic clinicians incentives. So uh incentive click key clinicians so you can as perhaps defer to growth shares that don't have initially um they could convert to um key performance uh uh target and uh key staff shares that actually don't give away any of what you would perceive as your equity uh in that you retain total control in terms of voting up until a point perhaps where the practices performing at a pre-agreed level were as a result of partially if not wholly uh on the performance of that point, it is fair for those shares to convert into perhaps the same shares that you've already got, that you're holding your A shares or your B s ordinary shares with the same voting rights as as as yourself. Um and that's a tool uh for retaining key clinic. This uh example is more um to do with uh investors. So um passive investors, it could be executives who uh have agreed to invest in uh the growth of your practice, and they could be given non-voting shares. So they're not involved in the day-to-day management of the company, uh, you could give them fixed returns rather than participating in the profits, so it reduces the risk for them. Um, so although this is not per se a loan, it kind of looks like a loan because they know they're gonna get a 3% reason uh on this class of share. Um, so you could issue them with non-voting uh shares with a 5% preferential dividend. So before anybody else takes anything by way of dividends, they get the percentage. Um and that can that can help with growth. Um so you've got the money in, it's it it's uh coming from from somewhere that you know, you haven't got to get got got to go through all the hoops of uh of borrowing. Um you may be in a situation where the banks aren't prepared to lend at this point in your growth profile, or if they are, that it's very expensive. And the bank and mum and dad have said, well, look, we'll give you the quarter of a million pounds you need to buy your next practice. Um, and um you say, okay, well, I'll give you, rather than a loan, uh I'll give you shares which participate in the unlikely event that the company goes bust and you know everything has all the assets are liquidated, you'll get your money back first. But in the meantime, you'll get a five percent coupon each year before anybody else gets paid out. And that's you know, it's it's a pretty good way of uh funding growth if you're in those circumstances. So um in general terms, um you need to be aware that alphabet uh the creation of alphabet shares or other uh different classes of shareholding can um create other issues. Um I mentioned earlier in terms of what you might want to see in your articles and or your shareholders' agreement, uh, bases of valuations. Um and I reiterate minority shareholdings can be valued at a lower level than a majority shareholding because they don't give the right to control. And there are arguments that can arise on the disposal of uh particular classes of share. Um those arguments are arguments that you might want to raise with HMRC in relation to any CTT calculation. Um but that but but it's important to consider these things when you're creating the structure. Um and tax advice is essential. Umvaluations, of course, also apply in terms of of provisions as to exiting. As uh we mentioned that earlier. So these are things that you need to consider in the round when you're considering what the a new uh structure is going to be, advice as to what the effect of these things is going to be. Um and there are also um uh other issues, and and I can tell you, I I I I spoke to uh an old client of mine only about four days ago who contacted me. I acted on purchase of her practice about uh about 14 years ago, um, and she told me in 2017, um, she shares amongst her members of her family. Um I I I I I I'm pretty sure that that that the overriding objective was to um uh basically uh enable her to spread the profits amongst the family and and uh utilize the lower tax um uh position and and their individual tax allowances. Um she's now uh her personal circumstances have now changed, uh, and there are things and and she's contemplating selling. So she said, you know, is there anything I need to do? I said, well, the first thing uh I I need to ask you is do you anticipate any, and this is without me um having sight of her uh articles association. In this uh situation, there's no shareholders' agreement. I wasn't, and she didn't come to us to deal with the uh uh creation of the new uh share classes. It was done by her accountant, uh, who I don't believe is a dental accountant. Um and I said, well, look, without looking at the uh articles, I I can't advise you properly, but um as things stand on the face of it, your the shareholding is held not just by you but but between yourself and and several others. And in the absence of any other agreements, if you sell the practice, the money is going to be distributed uh between all of the shareholders in proportion to the shares. Is that what you want? Uh and you know, in in this particular instance, she she really doesn't know if that is what she wants, because there's other personal changes going on and retirement and uh matrimonial issues. So um i i it's an interesting scenario. Now, it may actually also be um that there are tax advantages in leaving the situation as it is, because um uh those other shareholders are likely to have their own uh tax allowances. So the overall tax liability is probably going to be significantly less um if she sells and the money goes uh follows the existing shareholding. Now, um if, however, one or more of her family members um doesn't cooperate, then she's got a problem. Um because she would block the sale of the shareholders' agreement, or unless these particular issues have been the shareholders' agreement. In this case we know there isn't a shareholders agreement, so she can do what she wants to do and what the is under her pre uh existing regime if and when she does sell now, these are things that Ridvised to consider going into this. Uh, and and it would appear that she she she wasn't. She used a non-dental accountant, um, who, for the right reasons and probably with significant benefits, uh, put her into the structure, but she clearly didn't really understand it, and and um no thought has seems to have been given as to what the uh what what what the long-term position is going to be, and particularly in terms of what's gonna happen on an exit. So the the the the the cake the takeaway from that is all this is great and it enables you to do what you want to do. Uh there can be significant uh tax benefits from organizing your shareholdings in particular ways, but you also have to be mindful um on provisions as to exit. Um other common whoops, other common pitfalls, bad drafting. Now, mentioned before, um I I found um in in in reviewing the documents of um of one of the the the the the the the big dental corporates um historically the the the shareholders agreements and their articles uh often referred to provisions in each other. Um and in particular there was a section that that that in the shareholders agreement that said that X is as defined in the R the definition of X is as defined in the Articles of Association. And there was no such definition in the Articles of Association. Um now that sort of thing shouldn't happen. So it's very important that these things are well drafted by people who actually understand them uh and know what they're doing, because if you do get conflicts, it can cause all manner of problems. Um and there can be unclear rights. So again, it's it's important that whatever rights you are attaching to different classes of shares are very clear. Uh and misaligned documents, again, it's uh it means that you you need to make sure that there's no gaps as to what you're trying to create between the articles and the and the uh shareholders' agreement, that the two work perfectly well uh in tandem with each other. So, best practice is make sure that your articles are aligned, make sure that you plan and that you plan exits early. So if you're thinking of exiting your practice, selling your shares in the next few years, start thinking about it now. Have somebody who knows what they're doing, uh have a look at your articles and your shareholders agreement if you've got shares of more than one class, and make sure that it's not going to cause a problem in kind of inverted commas because uh it can't hold you to ransom. Because uh uh there's no clear what happens if you want to exit. It's not an ideal situation. Um that the continuing shareholder may want to buy the shares, you may not want to sell it, sell them to them. They may have a right to buy the shares, but there may not be proper provisions in as to how those shares are valued. Or indeed, it may all be there, but there may also be provisions in your shareholders' agreement or in your articles that says if somebody wants to sell their shares, they have to give X months notice in writing, and it has to be served on them in a particular way. So it's important that if that is the case, that you comply with those provisions properly. Even if you've had a kind of chat over a pint at some point with your partner and said, look, I think I might, you know, I think I've had enough. I might go in 18 months' time. And he said, Oh, well, don't worry, I'll buy your shares. If there's a if there's a specific provision in the articles or the shareholders' agreement as to how rights of preemption have to be dealt with, deal with them properly anyway, because it wouldn't be the first time I've seen a situation where there's been an informal conversation, and then six months down the line, um relations perhaps aren't as good as they were. Um, there could be some dispute over valuation or timings or whatever. And the continuing shareholder says, no, um, I don't accept this. You haven't served me notice in writing in accordance with the provisions of the shareholders' agreement. So have somebody look at it, make sure that you comply with any any uh requirements and do it in a timely manner. And and finally, um the old adage about speaking, and I hope I've achieved that to some extent today. KISS, keep it simple, keep it short and simple. Um you can create very, very complex structures. And in some cases, that's absolutely right to do. And if providing you've got people who are expert in it, then there's no reason not to do that. But just because you can have a very complex structure doesn't mean it's the right thing. Keep it as simple as you can, provided that your structure actually covers all of the issues that you need it to cover and will serve to avoid disputes down the line. Because all of these things are very much uh focused on getting it right up front to avoid what and and generally up front means when everybody's happy. It's like when people go into a partnership, you know, two dentists who are you know old pals, been through um uni together, decide to set up a practice in partnership, everything's great, no problems, everybody's happy. But 10 years down the line, um, perhaps when circumstances have changed, one or both may have married, there are wives involved, um, different considerations, people fall out. Um, and if you haven't put a partnership agreement in place at the beginning, it can be very difficult and very expensive to sort out once you fall them out. If you deal with all the things at the beginning in a partnership agreement, or where you've got an incorporated practice in the shareholders' agreement and articles, it avoids what can be very, very stressful and very, very, very uh expensive problems to sort out. So just finally key takeaways. Um Alphabet shares can give you flexibility, um, can entail can make sure that control remains where you want it to be and can be used to support growth. And that is it.

Dr James, 1h 1m 0s:

Thank you, Raven.

Ray, 1h 1m 1s:

So I hope that was useful. Um I I I I suspect it's probably not stuff that most dentists have um heard before, uh, but it's something that's very relevant. And um if nothing else, gives an awareness. I hope I've given you an awareness of the possibilities, the practicalities, and the reasons why um with a limited company you would you should always have a shareholders agreement. And um by creating differ shareholdings with different class rights, whether you call them A, B, C, D, E, F or you know, black, white, green, yellow, blue, um, it really doesn't matter. Um, but generally they're known as alphabet shares. And when people talk about alphabet shares, that's what they're talking about.

Dr James, 1h 1m 49s:

Right. Thanks so much. Yeah, that was a really comprehensive um cover of alphabet shares and how they're relevant to Dennis. And just one more thing. The only thing that remains is to shout out uh the firm that you represent, which is Acuria Law, of course. So uh any questions, queries, anything of that nature that might be relevant um to this call or might be relevant to this this podcast, rather. Uh Ray has just kindly put his details on the screen just then and also a q a QR code for those who wish to connect with him. Uh Ray Goodman at acurie law, www.acurilaw.com. Ray, thank you so much for your time once again in the Dennis Invest podcast. Looking forward to seeing you again very soon.