Classes of shares’ disavantages

While creating share classes within a company may have certain advantages, it is not a trivial decision.

The presence of share classes implies more cumbersome formalities for a number of operations. As an example, two of the most impacted operations are detailed below, namely:

  • the modification of the rights attached to the classes; and
  • the capital increase.

Modification of the rights attached to the classes

The creation and deletion of classes of shares, as well as the modification of the rights attached to them, require compliance with specific, particularly restrictive procedures.

I. When should these special procedures be respected?

The general assembly has to follow a particular procedure whenever it :

  • issues new classes;
  • deletes one or more classes;
  • unifies the rights attached to several different classes;
  • modifies, directly or indirectly, the rights attached to a class;
  • issues new shares out of proportion to the number of shares issued in each class.

This last point implies that when the company issues new shares, it is almost always subject to the procedure.

For the emission to be proportional in each class, it would be necessary:

  • either obtain firm and definitive subscription commitments prior to the decision to issue shares;
  • or provide in the terms of issue that if the capital increase is not fully subscribed, it will not be realised (in application of Article 7:191 in SA).

II. Special procedure

A. Information

All decisions that affect the share classes should be subject to an enhanced shareholder information procedure.

The board of directors should justify in a dedicated report the proposed changes and their consequences on the rights of existing classes.

If this report contains financial and accounting data, it must be validated by a statutory auditor or, failing that, an auditor or a chartered accountant, who confirms the accuracy and sufficiency of the data provided to the shareholders.

This report is mandatory and cannot be deviated from, even by unanimous agreement of the shareholders. In the case of a capital increase in a company without share classes, it is possible to deviate from this report.

B. Strengthened attendance and voting quorum

The modification of the rights attached to one or more classes requires a modification of the statutes.

The decision to amend the statutes must be taken in accordance with the following majorities:

Attendance and voting quorums must be reached in each class, which has the consequence of giving each class a veto right on the decision.

If some classes are composed of a small number of shareholders who represent only a tiny part of the shareholder base, this amounts to giving them a blocking minority and potentially paralysing the adoption of certain decisions.

For more information on this subject, please read the dedicated article by clicking here (article in french).

Issue of new shares

When new shares are issued in an LLC with several classes of shares, the holders of shares of the class in which new shares are issued have a preferential right, to the exclusion of the holders of other classes of shares.

In a public limited company, on the other hand, holders of shares of the class in which the issue is made only have priority over holders of shares of other classes.

As a result, the issuing company is obliged to carry out a “double subscription round“.

  • In the first instance, it offers the holders of the class of shares to be issued to exercise their preferential subscription rights.
  • When this first subscription round is fully subscribed, the company offers the other holders of the other classes to subscribe to the shares not subscribed in the first round.

The law does not specify whether :

  • organise two separate rounds in chronological order, with the second round starting only at the end of the 15-day preference period of the first round; or
  • only prioritise the subscriptions of the shareholders concerned by the first round over those of the second round after a common deadline.

If the first interpretation is adopted, this will further slow down the procedure and increase the period for exercising the preferential right to 30 days instead of 15.



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