February 20, 2026 • 64 mins
UK Dentists: Collect your verifiable CPD for this episode here >>> https://courses.dentistswhoinvest.com/smart-money-members-club
———————————————————————
Want control without owning every share? We explore how alphabet shares let dental founders keep a firm hand on strategy and clinical standards while still raising capital, rewarding key clinicians, and giving investors predictable returns. With corporate lawyer Ray Goodman, we translate complex UK company law into practical steps that fit the way dental groups actually grow.
We start by demystifying A, B and C share classes and the rights that sit behind them: voting power, dividend priority, capital distribution on exit, and protections like drag-along and tag-along. From there, we show how the Companies Act 2006, model Articles of Association, and a clear shareholders’ agreement work together. If you’ve wondered when to use enhanced-vote founder shares, when preference shares with a coupon make sense, or how growth shares align clinician performance with equity, this is your playbook.
Real examples bring the structures to life. Founders retain control while external investors get fixed returns. Associates earn upside via conversion triggers tied to EBITDA or revenue. Passive backers hold non-voting preference shares that look and feel like stable income. We also cover essentials many owners miss: how to amend Articles, obtain class consents, set valuation rules that avoid minority discount fights, and meet Dentists Act requirements on dentally qualified directors. Plus, we flag common drafting pitfalls and why aligning Articles and the shareholders’ agreement prevents nasty surprises at exit.
———————————————————————
Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional. Investment figures quoted refer to simulated past performance and that past performance is not a reliable indicator of future results/performance.
Listen
Watch
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Dr James (01:43):
Alphabet shares are something that we need to know
about as dentists because, ofcourse, they're relevant to
company structure, which is ofcourse useful to know whenever
it comes to deciding how we'regoing to structure our dental
practices or certainly any otherbusinesses that we might hold
long term.
And that's why I'm joined todayby Mr.
Ray Goodman of Ecuador.
We're going to be talking aboutalphabet shares, what they are,
(02:03):
how we can use them, what weneed to know in order to get the
most out of them, and how wecan stay safe out there whenever
it comes to our businesstransactions.
Looking forward to this podcastas ever.
As ever, you can claim your CPDfor this episode within the
official Dentists who investSmart Money Members Club.
Smart Money Members Club alsoincludes multiple mini courses
and webinar series on financefor dentists, including how to
(02:25):
become as tax efficient aspossible as well as
understanding investing.
All of this content counts asverifiable CPD, and you can
download your certificates thereand then upon completion of
each lesson.
In addition to this, we alsoinclude a whopping 10% discount
on your dental indemnity and a5% discount on lab bills for
dental principals, amongst otherperks and discounts for
(02:46):
members.
Please use the link in thedescription to claim your
verifiable CPD for this episode.
Welcome to this slightlyimpromptu live broadcast by
myself and Mr.
Ray Goodman of Acuity Law.
We're here today to talk aboutsomething that confuses the
absolute heck out of Dennis,probably because no one ever
(03:08):
really explained it to us and wenever had the opportunity to
learn.
So we're here to write thatwrong, so to speak, today, by
discussing alphabet shares,company structure, and
shareholders agreements, whichis hyper relevant to us dentists
and our business dealings and,of course, our dental practice
and other business intereststhat we might hold.
Ray, do you think that's a goodintro?
If you're happy, should we jumpstraight in?
Ray (03:30):
That's absolutely fine, James.
Dr James (03:32):
Brilliant.
So Ray has Ray has pres createda presentation on this topic
today.
So Ray's going to be sharinghis screen any moment now.
Just while Ray is getting thatup, there will of course be two
channels that people will belistening to this content on.
It'll either be on the DennisInvest Facebook group, the video
uh itself, or as well as that,uh it'll be on the Dentists Who
Invest podcast platform.
(03:53):
So we're gonna do our very bestto be as descriptive as
possible visually of the slides.
If you can't see the slides forwhatever reason and you'd like
to, the video is gonna be on theDentists Who Invest Facebook
group.
Cool.
All right, brilliant.
So we can go ahead and jumpstraight in.
I see Ray has got hispresentation up on the screen.
This stage is yours, Ray.
Ray (04:12):
All right, thanks, James, and uh welcome everybody um to
today's session on alphabetshares for um dental companies.
Um in this episode, we're goingto break down what alphabet
shares are, why they exist underUK company law, uh, and how
they're actually used in realdental businesses, particularly
groups that own multiplepractices.
(04:34):
It's it's practical, notacademic.
Um, and everything we covertoday is taken from structures
that that you can actually uhsee in real transactions.
Um so um here's what we'regonna cover.
Um, firstly, we're going toexplain what alphabet shares are
in plain English.
Then we'll look at the UK legalframework, especially articles
(04:59):
of association and shareholdersagreements.
Uh, and then finally, we'llwalk through worked examples uh
showing how uh dental corporatesactually use alphabet shares in
practice.
Now, I know alphabet shares isnot a uh uh a term that is uh
used every day by by mostdentists, but it is something
(05:22):
that that a lot of you will haveheard of.
Um perhaps some uh some of youraccountants 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 anygreat academic detail.
Um we don't need to do that atthis stage, but just to give you
(05:47):
what the possibilities are,what they are, and uh why
they're used.
So, firstly, what are alphabetshares?
Um, well, simply alphabetshares are different classes of
shares uh within the samecompany, um, usually named A
shares, B shares, C shares,etc., hence why they're called
alphabet shares, um, and so on.
(06:09):
They don't have to be called A,B, and C shares or E, F and G
shares.
Um, you can, if you want, callthem anything you like.
You could call them class one,class two, class three, but they
tend to be um A, B, and Cshares, or D, E and F shares, or
what whatever.
And it's just a way ofidentifying the different
(06:30):
classes of shares that havedifferent rights.
Um, and they're generally usedin very broad terms, and we'll
look at that in a bit moredetail in a moment, uh, to
tailor control and the economicsum of the the company.
So, firstly, um why use them?
Why why do companies havealphabet shares?
(06:53):
Well, in general terms, itallows you uh control without
full ownership.
Um and it's that they use tosolve very real problems.
Founders may, for example, wantto raise money but retain
control.
Key managers may need equityincentives, and investors may
(07:17):
want financial returns withoutoperational involvement.
And alphabet shares let youseparate economic reward from
decision-making power, andthat's the key thing theme
running through this.
So, for example, um, if um if adentist wants to sell part of
(07:37):
his practice or grant shareseffectively in that practice,
but doesn't want to grant giveaway full ownership, this is a
possible way of retaining umcertain aspects of troll
control, but perhaps not others.
Um it in it's it's it's avehicle that enables um dentists
(07:59):
uh to attract investors.
Um it's it's a way of possiblyrewarding management, uh, it's a
way of possibly managingsuccession uh of the ownership
of the company, or to distributeshares amongst family.
For example, in relation to thelast one, um, some people who
incorporate their practices,i.e., transfer it into a limited
(08:23):
company, um, do so uh wholly orpartly so that they can shed,
they can spread the sharesaround amongst their family, um,
as perhaps part of inheritancetax planning, uh, or perhaps
simply to reduce the income taxbill and utilize the annual uh
allowances for for other membersof family, you know, sons,
(08:49):
daughters, etc.
But perhaps, whilst wanting touh to utilize those benefits,
wants to retain the control ofthe company and the running of
the practice.
Uh and this is a way ofpossibly doing that.
So the UK legal framework um isset out in the Companies Act
(09:09):
2006, and the Act allowscompanies to issue multiple
classes of shares, but insistson clarity and fairness.
Um so if you create differentclasses of shares, the rights
attached to them must be clearlydocumented and properly
approved.
Uh and you can't be casualabout this because the law takes
(09:34):
share rights uh very seriously.
And the rights are generallyset out in the Articles of
Association, which is, if youlike, the company's
constitution.
Um the Companies Act 2006actually sets out in one of its
annexes, and we'll have a quicklook at that in a moment, um, a
(09:55):
specimen form of articles, whichin reality the vast majority of
UK private companies adopt.
And they used to be calledtable A articles.
From 2006, they're called themodel articles.
And if you don't uh make anychanges to them, that is the uh
(10:17):
form of articles that will applyto your company.
So often when when uh lawyersor accountants form new
companies for clients, dentistsor otherwise, they'll either
leave the articles as they are,or which is more general,
they'll make specific changes tothe um to the model articles.
(10:37):
Of course, in somecircumstances, we'll draft
completely new articles.
There's no obligation to adoptthe model articles, it's just um
easy and and and effective.
And and most of the terms inthe model articles fit the
majority of sort of standard UKcompanies.
But if you want to startchanging share classes, adding
(10:59):
different shares, then um wewould either alter the uh model
articles or produce completelynew articles.
So, articles.
Um critical document, as Isaid, it's the company's um
actual constitution, sets out umall the rules and regulations
(11:22):
in relation to the uhconstitution and and and and the
uh compliance of the company.
Uh and within that the shareclasses will be defined.
Um so if you've got alphabetshares, all of the details
regarding those differentclasses of shares will be
contained in the articles ofassociation.
(11:44):
If you've already got a companyand then you want to adopt this
type of structure with withalphabet shares, different
classes of shares, then theorartical amending.
Uh not a very complexprocedure, but has to be done by
somebody who knows what whatthey're doing.
(12:05):
In general terms, it normallyrequires um a special resolution
to amend the articles, um, andthat will require a majority of
75% of the shareholders.
If you've got different classesof share and you plan to change
uh the class rights, i.e.
the rights of that particularclass, then 75% of the holders
(12:29):
of that class uh have toconsent.
So you have to give it somethought how you structure this
before you before you go intothis sort of structure, because
further down the line, if uh anevent happens that requires you
to change that structure or disor dispose of those shares, um,
it can become more complex.
(12:51):
And always remember that thearticles of association are a
public document.
Um, they are available foranybody to see uh by searching
the record of the company atcompany's house, which uh
anybody can do.
So what are the what mustarticles contain?
Well, um, when a company's gotmultiple share classes, the
(13:13):
articles must specify the votingrights.
Uh, how much how many voteseach share holds.
Now, you would think that everyshare has a has has a has one
vote.
That's not the case.
You can stipulate that the Ashares have three votes, five
votes, ten votes, and the Bshares hold one vote.
(13:35):
You can also have non-votingshares.
So you may want, um, as aprincipal, you may decide to uh
retain all of the voting shares,but grant other classes of
shares to your family orinvestors, which give them
rights to participate in theprofits, uh, to receive
dividends, and rights toparticipate if the company's
(13:57):
wound up.
Um, you could also add uhprovisions as to what happens if
the company's sold.
Uh, there are things called umdrag-along rights and tag-along
rights, um, which um enable umone class of shareholder,
perhaps those with the votingshares, to drag along all of the
(14:19):
other shareholders if the umvoting shareholders decide to
dispose of the company.
So you you you you avoid asituation where perhaps
non-voting shareholders couldblock um a deal that you, as
principal, have decided is theright thing for you and for the
(14:39):
company.
Um the next thing that thatwill be set out in the articles
would be the dividend rights.
Not all shares, as I've justsaid, not all shares would
necessarily participate at allin dividends.
And others may have differentrights to receive dividends in
different circumstances.
So you can, for example, havepreference shares.
(15:00):
They would have a preferentialdividend before the
non-preferential shares.
So if you've made, say, ahundred thousand pounds profit
and you've got a class ofpreferential shareholders uh
that have a right to uhparticipate in the first hundred
thousand pounds worth ofshares, sorry, uh of profits,
(15:22):
then they are eligible toreceive that first hundred
thousand pounds of profitsbefore the non-voting, the
sorry, the non-participatingshares uh receive anything.
Um capital rights.
Well, capital rights are whathappens on a sale or winding up
of the company.
Again, I've seen companies withwith uh classes of shares that
(15:47):
don't participate at all in theprofits, um, aren't entitled to
receive dividends, but arepreferential in terms of winding
up.
Now, those shares could also beum could also bear a coupon.
So you they could um not haveany rights to participate in
(16:08):
profits, uh i.e.
receive dividends, but they maybe entitled to a fixed coupon
each year like interest.
Um it's not technicallyinterest, but it's effectively
the same thing.
So they may be entitled to a a5% um preferential payment each
(16:29):
year um before they participate,before any of the dividends and
before they participate individends.
And you can get fairly complexstructures where different
shares uh are entitled topreferential payments either of
a of a fixed uh coupon orpreferential um uh participation
(16:53):
in profits up to a certainlevel, and then another share of
another class of shares kick inafter that, and then the first
class kick in um after a furtheruh uh uh ceiling has been uh
reached.
So it can get fairlycomplicated.
Um and and finally, classprotections.
Well, class protections is uh areference to protections um of
(17:19):
the rights of minorityshareholders.
The Companies Act does haveprovisions in that protect
minority shareholders from beinguh effectively um abused by
majority shareholders.
Um it that it does provideprovisions that if um the
majority is being unfair um andunreasonable to minorities, that
(17:42):
um that they can have a rightto petition the court.
Um but but it's far betterrather than get to that
situation to make sure that anyany required protections are
enshrined in the articles ofassociation to avoid any
disputes of that of that length.
Um so that is broadly whatarticles will uh will contain.
(18:09):
Now, this is just a snapshot ofthe index to the model articles
which are annexed to um theCompanies Act 2006, and you can
see without spending too muchtime on it, it sets out um
directors' powers andresponsibilities, um, decision
(18:32):
making, how the directors are toconduct the process of decision
making, um, appointment ofdirectors, and then uh shares
and distributions.
Sorry, I've just uh skippedforward.
Um and all the rules can allthe rules relating to how the uh
(18:54):
to the different types ofshares and how the company is to
be run um and uh and achievecompliance um are to be
conducted.
Uh this isn't an exhaustive uhindex, it's part of the index,
but it's just there to give youa flavor of the sort of things
that will be in your articles ofassociation.
(19:16):
If you've already got a limitedcompany, you will your company
will have articles ofassociation, whether you've ever
seen them or read them or not.
Uh and if you're curious, youcan go on if you haven't got a
copy or um you can get a copyfrom your accountants or
lawyers, but you can also go onto Company's House and do a
search.
You do um a beat that there isa free search facility now on
(19:39):
Company's House Direct.
You can read the articles.
Um, I don't know that many ofyou would want to do it.
If any of you are insomniacs,it's probably a great way of
getting yourself to sleep atnight.
Um, but otherwise, if you'vegot any queries, speak to uh
speak to your accountants orspeak to uh uh uh suitably
qualified uh corporate lawyers.
So um what happens if you wantto change your share classes?
(20:03):
So let's assume you've got acompany um it's got broadly
standard um um uh articles um asper the the the the the the um
the standard articles.
Um and as I said before, wewant to change the situation
(20:25):
from having say a a 100 poundshare capital of one pound A
ordinary shares, and we want tocreate some new uh uh classes of
shares.
Um well the first thing is asyou've probably gathered, you
can't just change them byagreeing uh with with your
shareholders in the pub.
(20:46):
Um introducing new shareclasses or changing existing
rights will normally require aspecial resolution, and as I've
already said, that's a 75% uhresolution of all of the
shareholders if there's only oneshare class, or if you're
changing the class rights of aparticular share um uh share
(21:08):
class, then you'll need 75% ofthe holders of those shares.
Now, again, there are certaincircumstances where you might in
your articles um change thatand make provisions that to
change um to change the rightsof a particular type of share or
to change rights in aparticular type of way, um,
(21:30):
there is a different process,and you might need a hundred
percent or or fifty percent.
Um at the end of the day, it'syour company.
Um, and it's a matter for thedirectors uh and the
shareholders to decide how thatcompany is to operate and what
(21:51):
uh steps are to be taken andwhat what the articles are to
say.
There are some um provisionswhich which you can't change uh
because they would fly in theface of the provisions of the
Companies Act.
So overall, before taking anysuch steps, you need to get
proper advice.
(22:12):
Um we at Acuity have have awhole team that that deal with
this sort of thing.
Um we have created many of thestructures for a lot of the
bigger corporates.
Um we act for several of thelarger corporate uh uh dental
providers uh and have createdthe structures for them.
(22:32):
And any of them, uh any of youwho have uh sold practices to uh
some of the bigger corporatesuh will will know that some of
them have quite complex sharestructures to allow them, as
part of their acquisitionpolicy, to issue uh different
classes of shares to the sellersto enable those sellers to get
(22:55):
additional consideration if theyhit certain targets.
It could be targets as toturnover, it could be targets as
to profit.
Um uh they also um may includeprovisions.
I know the old Dentex um uhshare structure, which which
which I did many, manytransactions on and were very
(23:16):
familiar with uh super complexuh deal uh documents.
This was the the old Dentex uhuh the old Dentex setter before
the uh uh they merged with uhPortman.
It's far more simple now.
But the old structure had alldifferent types of share, um,
(23:39):
which had all sorts of differenttypes of of uh of writing.
And and their documents werevery, very complex.
But in order, if you decide youwanted to change your share uh
structure uh to includedifferent classes of alphabet
shares, then this is what youhave to do.
Generally, a specialresolution, i.e., a 75% majority
(24:01):
of voting shares.
Now we talked about articles,and the articles do set out the
the um uh the constitutionalprinciples of the company.
Um having said that, um, if youare going to have a uh a
(24:22):
situation where you've got morethan one class of shareholder,
um, or in fact, even if you'vejust got more than one
shareholder, then it's almostalways advisable to also have a
shareholders' agreement.
Um, and that sits alongside uhthe share the articles.
It's not a legal requirement tohave a shareholders' agreement,
(24:45):
as it is with articles, um, butit is best practice.
Uh, in the same way as if youare not a limited company and
you are in a partnership or anexpense sharing agreement, um,
you would always be best advisedto have either an expense
sharing uh agreement if it's anexpense share or a partnership
agreement if you're apartnership, to set out more of
(25:08):
the day-to-day running uh uhprinciples of the company.
So a shareholders' agreement isnot a statutory requirement,
it's a private contract.
And it sets out the commercialterms um agreed between the
parties.
So whereas the articles definethe legal rights, the
(25:28):
shareholders' agreement uh moredefines how shareholders
actually uh behave um betweenthemselves, and it's very much
more a commercial uh document.
It is possible that some of theof the uh principles in the
shareholders' agreement willcross over um into uh the
(25:51):
articles.
And there are some terms thatcould be in the articles or they
could be in the shareholders'agreement.
Uh it's important in thosecircumstances to make sure that
you don't have conflicting termsin the articles and the
shareholders' agreement.
Uh, and I can tell you that Ihave seen that on more than one
occasion.
Uh and it uh and on occasion,uh, I've seen it in very complex
(26:13):
um corporate structures on someof the big uh dental
corporates, when in fact umtheir their articles and the
share structures um contradicteach other.
Um and um I I won't mentionwhich companies it is, but I
have pointed that out to theirlawyers um and been told, yeah,
we know, but we can't changethem because um there was
(26:35):
another there's another firm oflawyers that deals with the uh
the the articles and we do withthe shelves agreements and um
and um just a silly situationwhich should never happen.
Dr James (26:46):
Which takes which takes precedent, can I ask?
UK dentists, Dennists WhoInvest now has an official
platform where you can learnabout finance and obtain UK
compliant, verifiable CBD at thesame time.
The only platform that existson which you can do both.
The Smart Money Members Clubhas hundreds of hours of mini
courses, webinar series, andlive day recordings on all
(27:07):
things finance slash taxefficiency for UK dentists.
This includes complete courseson how tax works for UK
dentists, finance so that youcan invest and grow your own
money, business so you canimprove your profitability as an
associate or principal, and forthose out there that want it,
there's also a mini course andhow you can responsibly enter
(27:27):
the crypto space using measuredamounts of capital.
I've gathered this content fromthe best of the best I could
find in each respective area sothat you know that this is how
people at the forefront of eachfield advise their clients.
The Smart Money Members Clubalso contains discounts on
common things that UK dentistsneed to pay for on a regular
basis.
This includes a whopping 10%discount on dental indemnity,
(27:51):
the offer to beat your incomeprotection deal no matter what
you're paying, and for theprincipals out there, 5%
discount on lab bills and 10%discount on practice insurance.
These are designed to offerhundreds, if not thousands, in
annual savings.
The purpose of this membersclub is to not only boost your
monthly income but also manageyour outgoings as much as
possible and therefore createmore profit.
(28:12):
To celebrate the launch of theSmart Money Members Club, and
given that the CPD deadline iscoming up soon, I've decided to
offer the first month of thisplatform entirely for free.
This offer will end in thecoming weeks as soon as the
current CPD cycle is up.
To collect your CPD for thispodcast episode using the Smart
Money Members Club, feel free touse the link in the description
(28:34):
of this podcast.
Ray (28:39):
Good question.
Um they are a uh a statutory umuh uh document filed at the
company's house.
Um and I I I I I I I wouldthink that uh in the absence of
agreement the articles wouldtake precedent.
Okay.
(29:00):
Um it it it's actually is it itmay be that there's a provision
in the shareholders agreementthat says that in the in in the
event of a conflict between thearticles and the shareholders
agreement, that the shareholdersagreement would take
precedence.
But it depends every everycompany has to be looked at
separately.
Um but but but the main messageis yeah, don't make sure that
(29:23):
doesn't happen, because you justyou know you've you you're just
causing problems storing up apotential problem further down
the line.
And if you need to um rely onone of the principles that that
is conflicted, you've got aproblem.
Um but it's a good question,James.
Thanks.
Dr James (29:41):
Yeah, curious, just curious, just curious.
Thanks for clearing that.
Ray (29:44):
No, it's an excellent, excellent um question.
So um key shareholdersagreement uh clauses.
Um in dental corporates, um,shareholders' agreements usually
cover things like transfers.
Um, what happens on the in theevent of a transfer?
(30:06):
So say for simplicity, we'vegot two shareholders, a
shareholder and b shareholder,each with their own rights.
Um one shareholder decides thathe wants to sell his shares to
um a third party.
What happens then?
Well, normally, um, if it's notin the sometimes it's in the
articles, but if not, it can bein the shareholders' agreement.
(30:30):
And the usual the usualprovision you would put in would
be subject to if this is agreedbetween the shareholders, that
if one wants to sell, then hefirst has to offer it to the
continuing shareholder.
And then if that shareholderdoesn't want to buy, then um the
the first the the the the thethe selling shareholder can
(30:53):
offer it to third parties.
Um there will be uh provisionsas to how those shares are to be
valued, if there's to be asale, i.e.
if um if the shareholdersagreement or the articles
provide that uh there are what'sknown as preemption rights,
(31:13):
i.e., the the the the otherclass of shareholders have the
right of first refusal, thenthere needs to be a mechanism to
decide what the figure is, whatthey're worth.
Uh and usually we provide forum each party perhaps to either
a joint appointment of a jointvaluer, perhaps uh a named
(31:35):
valuer like Christie's or FrankTaylor's, um, or provision for
uh a valuation by the company'saccountants, or uh each party to
appoint a valuer and in defaultof agreement for one to be
selected by the president of umthe BDA for the time being.
(31:56):
Lots of different ways to skinthat cap.
But the the important thing iswe have a uh a defined process
to uh agree uh the valuation onon sale.
Otherwise, you can have hugedisputes over what the shares
are actually worth.
(32:16):
Obviously, the seller is goingto argue that they're worth
more, and the buyer is gonna sayis gonna raise article, uh, is
gonna raise all whatever umarguments that he can.
For example, um if the uh ifone if if if the continuing
shareholder is a my is a umminority share is a majority
(32:38):
shareholder and the minorityshareholder is being offered,
um, there's a there's apotential argument to say, well,
actually, that a minorityshareholding is worth less
because it's a minority anddoesn't confer control.
Um so that is something thatperhaps could would be dealt
with in the shareholders'agreement to say that no
(33:02):
discount will be given um forminority holdings um or other,
you know, or or it could be saythat 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 pinneddown when you're uh
constructing your your yourcorporate uh uh uh structure,
(33:24):
your shareholders' agreement andand 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 achairman?
Um are all decisions to be madeon a simple majority of
directors?
Um, does ownership of aparticular class of share given
(33:50):
automatically uh uh uh uh adirector or more than one
director on the board?
So this is uh an area where youcan control how the board is
made of what happens if somebodyleaves or says, for example, if
somebody uh ceases to become ashareholder, they automatically
(34:14):
have been uh have designed to bemindful in terms of the board
constitution of a limitedcompany, um, of the terms of the
Dentists Act, which say anybodycan own shares in a dental
corporate.
Um, you don't have to be adentist to own shares, and you
don't even have to have adentist on um uh uh as a uh to
(34:39):
to hold shares.
So you all the shares could beheld by non-dentists, and you
don't even have to be a DCPdental care professional.
The provision in the DentistsAct says that a dental uh
limited company, a dentalcorporate, cannot have a
minority of dentally qualifieduh persons as directors.
(35:03):
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 morenon-DCPs than DCPs.
Uh, and that is oftenmisunderstood, uh, including um,
(35:26):
for example, by the GDC, um,who at one stage, and I haven't
checked recently whether it'sbeen changed, said that that a
dental corporate has to have amajority 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, butyou can't have minority.
(35:49):
And the final thing in terms ofuh key shareholder agreement
clauses is exit rights.
We touched on this a little bitbefore.
What happens if somebody wantsto leave?
And also what happens ifsomebody dies?
What happens to their shares?
So there are two terms that areoften used in terms generally,
(36:12):
actually, these the the exitrights would be dealt with in
the articles.
And there are two things thatare that are normally in the
articles provisions as to theprocedure on the transfer of a
share, which uh relates to thesituation where somebody decides
they want to sell.
Uh, and the other, uh, whathappens on the transmission of a
(36:34):
share?
Transmission referring to thesituation where somebody dies
and the shares are transmittedrather than transferred in
accordance with that person's uhwill or uh the administration
of their estate.
Dr James (36:50):
And and Ray, just a quick question.
What is the advantage of havingthese things outlined in the
shareholders' agreement versusthe articles of association?
Ray (37:01):
Um it's a it it it's a moot point.
Um as I said, uh theshareholders' agreements tend to
deal more with the day-to-daymanagement of the company, um,
but can include um these thingsthat we've just uh spoken about.
Um having said that, thearticles can also deal with
(37:25):
most, if not all, of thosethings.
And what tends to happen isthat the articles tend to deal
with the big things like umtransfers, um valuation, um
board control.
But if they don't, rather thanchanging the articles, often
(37:48):
it's easier if you just whenforming the company, you you buy
the effectively a company offthe shelf, which you can do
online in about five minutes,and it used to cost 300 quid,
uh, you can now do it for about10 pounds, um, and you get the
company with the standardarticles of association.
(38:09):
Rather than starting to do umpassing resolutions and and and
uh which then have to be filedat the company's house, and you
have to reprint the articleswith in the amended form,
sometimes just as a matter ofconvenience, it can be uh easier
just to uh include those thingsin the shareholders agreement.
(38:32):
I see.
But I mean we yeah, we we we wewe could talk about this the
particular question for for foryou know for for an hour or two
because there are differentopinions.
Uh another view would be well,a shareholders agreement is a
contractual document between theparties, whereas articles of
(38:53):
association are actually astatutory um document.
And one what once created orfiled at Company's house,
they're a matter of publicrecord, and anyone can see them.
So um there's a day, I supposethere's a slight danger if you
muck up your shareholders'agreement and it's not clear um
or for for for any reason thereare uh uh contractual questions
(39:17):
over its enforceability, um,that there's a slightly greater
risk of that with a withshareholders' agreement than
there are with articles.
Having said that, ashareholders agreement is a
private document between theparties, and you may not want to
see things like dividend policyum or or a basis of valuation
(39:38):
or who does what on a day-to-daybasis within the company um on
a public document.
You may want to keep thosethings confidential between the
shareholders, makes completesense.
Which would be a good reason toput them in the shareholders
agreement rather than thearticles.
Dr James (39:55):
Makes complete sense.
Yeah, I was just trying tofigure out what's the advantage,
I guess.
Ray (39:59):
Yeah, that the the the the there is no hard and fast rule.
There are a few things thathave to go and would also always
go in the articles.
The articles have to containcertain uh things broadly in
line with the things that we didthat that we mentioned when we
spoke to the articles.
(40:19):
But you saw Bot from the justfrom the index of the standard
articles, there's a lot of stuffin there.
Um and the Companies Actprovide that a lot of stuff, a
lot of that stuff has to be inthe articles.
So the key thing is to makesure that you don't have a
conflict between shareholders'agreement and and and articles.
And in drafting theshareholders' agreement, you
(40:41):
would normally have a clause atthe end to say that in the event
of any conflict, in case you'vecreated something by accident,
which one prevails?
Dr James (40:50):
Nice, okay, got it.
Ray (40:52):
To avoid that issue.
So um I think we've got now afairly um broad understanding of
of uh of what it's about, whatit what what alphabet shares
are.
So why would you uh why wouldyou use alphabet shares and why
(41:12):
why particularly do the largerdental groups, not only the
larger ones, but butparticularly larger uh groups
use alphabet shares?
Um you almost always uh finddifferent classes of shares in
(41:32):
the larger um corporates.
Um because you often havefounding dentists, you have
associate clinicians, you havenon-clinical management, and you
can have external investors,all with different priorities.
The external investors are inthere not because they want to
run dental practices per se, butthey're in there for as an
(41:56):
investment.
They want to see returns, andthey may say, right, we we we we
will uh uh invest X millionpounds 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 ouruh investment.
So we say, right, we we wantthree, we're gonna have um for
(42:20):
for for our million poundinvestment, we're gonna have
half a million pound in um uh incumulative uh preference shares
that have a preferred dividendof five percent.
Um, and then they participatealong with the uh uh the B
shares, which are the ones thatare held by um the original.
(42:45):
Uh and then there could beother classes of shares which
they issue to sellers um toreward to give them additional
incentive on top of the the thethe seller certain targets they
get issue um through throughthrough a shit through a class
(43:06):
of share.
Um as we said, externalinvestors, it's a it's a it's an
ideal way of rewarding externalinvestors who can limit their
risk by by um by by takingpreferential um dividends or or
a coupon.
Um and need for control.
(43:27):
Well, um it may well be thatthe uh the selling or the
existing principles, uh whilstthey're happy to have perhaps
venture capital money investedin the practice to enable them
to expand and acquire morepractices, they um they want to
(43:48):
retain control of the businessand therefore they would retain
voting control, or perhaps justvoting control on clinical
issues.
There's no hard and fast rulehere, James.
You can basically create yourown structure.
Um, and and you know, we asacuity, I know, have have
(44:09):
created very different and andquite novel structures for a
number of the larger corporatesthat uh that that are uh out
there acquiring today.
Um so let's look at some uh uhuh um quick examples.
So this slide deals with asituation where you've uh um
(44:33):
where founders want to raisecapital but they want to retain
strategic and clinic clinic andcontrol.
So that they may hold a classof shares with enhanced voting
rights, um, and the investorsreceive shares with standing
votes but prefer butpreferential economic returns, a
little bit like I was justexplaining.
Um so the investors areprotected financially, but the
(44:56):
founders retain control over thedirection of the group.
Uh, and that's a very umprivate equity friendly
structure.
Um I was going to say, but I'vealready said it that here um
pure investors can be given a recould could be given redeemable
(45:18):
preference shares um or fixeduh coupon shares um uh and
participating shares.
It it's it's a real sort offruit salad.
You can you you can create youcan create the structure that
works for your business at thatpoint.
So if you're bringing inexternal investors, you can the
(45:43):
There are ways of retainingcontrol, there are ways of
giving specific areas of controland different ways of
controlling um how the profitsare distributed.
Example two is more uh designedfor clinic clinicians
(46:08):
incentives.
So uh incentive click keyclinicians so you can as perhaps
defer to growth shares thatdon't have initially um they
could convert to um keyperformance uh uh target and uh
(46:36):
key staff shares that actuallydon't give away any of what you
would perceive as your equity uhin that you retain total
control in terms of voting upuntil a point perhaps where the
practices performing at apre-agreed level were as a
result of partially if notwholly uh on the performance of
(47:05):
that point, it is fair for thoseshares to convert into perhaps
the same shares that you'vealready got, that you're holding
your A shares or your B sordinary shares with the same
voting rights as as as yourself.
Um and that's a tool uh forretaining key clinic.
(47:27):
This uh example is more um todo with uh investors.
So um passive investors, itcould be executives who uh have
(47:48):
agreed to invest in uh thegrowth of your practice, and
they could be given non-votingshares.
So they're not involved in theday-to-day management of the
company, uh, you could give themfixed returns rather than
participating in the profits, soit reduces the risk for them.
Um, so although this is not perse a loan, it kind of looks
(48:12):
like a loan because they knowthey're gonna get a 3% reason uh
on this class of share.
Um, so you could issue themwith non-voting uh shares with a
5% preferential dividend.
So before anybody else takesanything by way of dividends,
(48:35):
they get the percentage.
Um and that can that can helpwith growth.
Um so you've got the money in,it's it it's uh coming from from
somewhere that you know, youhaven't got to get got got to go
through all the hoops of uh ofborrowing.
Um you may be in a situationwhere the banks aren't prepared
(48:57):
to lend at this point in yourgrowth profile, or if they are,
that it's very expensive.
And the bank and mum and dadhave said, well, look, we'll
give you the quarter of amillion 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 shareswhich participate in the
(49:20):
unlikely event that the companygoes bust and you know
everything has all the assetsare liquidated, you'll get your
money back first.
But in the meantime, you'll geta five percent coupon each year
before anybody else gets paidout.
And that's you know, it's it'sa pretty good way of uh funding
growth if you're in thosecircumstances.
(49:43):
So um in general terms, um youneed to be aware that alphabet
uh the creation of alphabetshares or other uh different
classes of shareholding can umcreate other issues.
(50:05):
Um I mentioned earlier in termsof what you might want to see
in your articles and or yourshareholders' agreement, uh,
bases of valuations.
Um and I reiterate minorityshareholdings can be valued at a
lower level than a majorityshareholding because they don't
(50:31):
give the right to control.
And there are arguments thatcan arise on the disposal of uh
particular classes of share.
Um those arguments arearguments that you might want to
raise with HMRC in relation toany CTT calculation.
(50:52):
Um but that but but it'simportant to consider these
things when you're creating thestructure.
Um and tax advice is essential.
Umvaluations, of course, alsoapply in terms of of provisions
as to exiting.
As uh we mentioned thatearlier.
(51:15):
So these are things that youneed to consider in the round
when you're considering what thea new uh structure is going to
be, advice as to what the effectof these things is going to be.
Um and there are also um uhother issues, and and I can tell
(51:39):
you, I I I I spoke to uh an oldclient of mine only about four
days ago who contacted me.
I acted on purchase of herpractice about uh about 14 years
ago, um, and she told me in2017, um, she shares amongst her
(52:02):
members of her family.
Um I I I I I I'm pretty surethat that that the overriding
objective was to um uh basicallyuh enable her to spread the
profits amongst the family andand uh utilize the lower tax um
(52:23):
uh position and and theirindividual tax allowances.
Um she's now uh her personalcircumstances have now changed,
uh, and there are things and andshe's contemplating selling.
So she said, you know, is thereanything I need to do?
I said, well, the first thinguh I I need to ask you is do you
anticipate any, and this iswithout me um having sight of
(52:47):
her uh articles association.
In this uh situation, there'sno shareholders' agreement.
I wasn't, and she didn't cometo us to deal with the uh uh
creation of the new uh shareclasses.
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
(53:07):
articles, I I can't advise youproperly, but um as things stand
on the face of it, your theshareholding is held not just by
you but but between yourselfand and several others.
And in the absence of any otheragreements, if you sell the
practice, the money is going tobe distributed uh between all of
(53:30):
the shareholders in proportionto the shares.
Is that what you want?
Uh and you know, in in thisparticular instance, she she
really doesn't know if that iswhat she wants, because there's
other personal changes going onand retirement and uh
matrimonial issues.
So um i i it's an interestingscenario.
Now, it may actually also be umthat there are tax advantages
(53:52):
in leaving the situation as itis, because um uh those other
shareholders are likely to havetheir own uh tax allowances.
So the overall tax liability isprobably going to be
significantly less um if shesells and the money goes uh
follows the existingshareholding.
Now, um if, however, one ormore of her family members um
(54:19):
doesn't cooperate, then she'sgot a problem.
Um because she would block thesale of the shareholders'
agreement, or unless theseparticular issues have been the
(54:42):
shareholders' agreement.
In this case we know thereisn't a shareholders agreement,
so she can do what she wants todo and what the is under her pre
uh existing regime if and whenshe does sell now, these are
(55:05):
things that Ridvised to considergoing into this.
Uh, and and it would appearthat she she she wasn't.
She used a non-dentalaccountant, um, who, for the
right reasons and probably withsignificant benefits, uh, put
her into the structure, but sheclearly didn't really understand
it, and and um no thought hasseems to have been given as to
(55:25):
what the uh what what what thelong-term position is going to
be, and particularly in terms ofwhat's gonna happen on an exit.
So the the the the the cake thetakeaway from that is all this
is great and it enables you todo what you want to do.
Uh there can be significant uhtax benefits from organizing
(55:46):
your shareholdings in particularways, but you also have to be
mindful um on provisions as toexit.
Um other common whoops, othercommon pitfalls, bad drafting.
Now, mentioned before, um I Ifound um in in in reviewing the
(56:08):
documents of um of one of thethe the the the the the big
dental corporates umhistorically the the the
shareholders agreements andtheir articles uh often referred
to provisions in each other.
Um and in particular there wasa section that that that in the
shareholders agreement that saidthat X is as defined in the R
(56:32):
the definition of X is asdefined in the Articles of
Association.
And there was no suchdefinition in the Articles of
Association.
Um now that sort of thingshouldn't happen.
So it's very important thatthese things are well drafted by
people who actually understandthem uh and know what they're
doing, because if you do getconflicts, it can cause all
(56:53):
manner of problems.
Um and there can be unclearrights.
So again, it's it's importantthat whatever rights you are
attaching to different classesof shares are very clear.
Uh and misaligned documents,again, it's uh it means that you
you need to make sure thatthere's no gaps as to what
(57:16):
you're trying to create betweenthe articles and the and the uh
shareholders' agreement, thatthe two work perfectly well uh
in tandem with each other.
So, best practice is make surethat your articles are aligned,
make sure that you plan and thatyou plan exits early.
(57:38):
So if you're thinking ofexiting your practice, selling
your shares in the next fewyears, start thinking about it
now.
Have somebody who knows whatthey're doing, uh have a look at
your articles and yourshareholders agreement if you've
(57:59):
got shares of more than oneclass, and make sure that it's
not going to cause a problem inkind of inverted commas because
uh it can't hold you to ransom.
Because uh uh there's no clearwhat happens if you want to
(58:31):
exit.
It's not an ideal situation.
Um that the continuingshareholder may want to buy the
shares, you may not want to sellit, sell them to them.
They may have a right to buythe shares, but there may not be
proper provisions in as to howthose shares are valued.
Or indeed, it may all be there,but there may also be
provisions in your shareholders'agreement or in your articles
(58:53):
that says if somebody wants tosell 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 thatis the case, that you comply
with those provisions properly.
Even if you've had a kind ofchat over a pint at some point
(59:14):
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'tworry, I'll buy your shares.
If there's a if there's aspecific provision in the
articles or the shareholders'agreement as to how rights of
preemption have to be dealtwith, deal with them properly
anyway, because it wouldn't bethe first time I've seen a
(59:35):
situation where there's been aninformal conversation, and then
six months down the line, umrelations perhaps aren't as good
as they were.
Um, there could be some disputeover valuation or timings or
whatever.
And the continuing shareholdersays, no, um, I don't accept
this.
You haven't served me notice inwriting in accordance with the
(59:58):
provisions of the shareholders'agreement.
So have somebody look at it,make sure that you comply with
any any uh requirements and doit in a timely manner.
And and finally, um the oldadage about speaking, and I hope
I've achieved that to someextent today.
(01:00:19):
KISS, keep it simple, keep itshort and simple.
Um you can create very, verycomplex structures.
And in some cases, that'sabsolutely right to do.
And if providing you've gotpeople who are expert in it,
then there's no reason not to dothat.
(01:00:39):
But just because you can have avery 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 theissues that you need it to cover
(01:01:00):
and will serve to avoiddisputes down the line.
Because all of these things arevery much uh focused on getting
it right up front to avoid whatand and generally up front
means when everybody's happy.
It's like when people go into apartnership, you know, two
(01:01:21):
dentists who are you know oldpals, been through um uni
together, decide to set up apractice 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 havemarried, there are wives
(01:01:41):
involved, um, differentconsiderations, people fall out.
Um, and if you haven't put apartnership agreement in place
at the beginning, it can be verydifficult and very expensive to
sort out once you fall themout.
If you deal with all the thingsat the beginning in a
partnership agreement, or whereyou've got an incorporated
(01:02:02):
practice in the shareholders'agreement and articles, it
avoids what can be very, verystressful and very, very, very
uh expensive problems to sortout.
So just finally key takeaways.
(01:02:23):
Um Alphabet shares can give youflexibility, um, can entail can
make sure that control remainswhere you want it to be and can
be used to support growth.
And that is it.
Dr James (01:02:43):
Thank you, Raven.
Ray (01:02:44):
So I hope that was useful.
Um I I I I suspect it'sprobably not stuff that most
dentists have um heard before,uh, but it's something that's
very relevant.
And um if nothing else, givesan awareness.
I hope I've given you anawareness of the possibilities,
(01:03:04):
the practicalities, and thereasons why um with a limited
company you would you shouldalways have a shareholders
agreement.
And um by creating differshareholdings with different
class rights, whether you callthem A, B, C, D, E, F or you
know, black, white, green,yellow, blue, um, it really
doesn't matter.
(01:03:25):
Um, but generally they're knownas alphabet shares.
And when people talk aboutalphabet shares, that's what
they're talking about.
Dr James (01:03:32):
Right.
Thanks so much.
Yeah, that was a reallycomprehensive um cover of
alphabet shares and how they'rerelevant to Dennis.
And just one more thing.
The only thing that remains isto shout out uh the firm that
you represent, which is AcuriaLaw, of course.
So uh any questions, queries,anything of that nature that
might be relevant um to thiscall or might be relevant to
(01:03:53):
this this podcast, rather.
Uh Ray has just kindly put hisdetails on the screen just then
and also a q a QR code for thosewho wish to connect with him.
Uh Ray Goodman at acurie law,www.acurilaw.com.
Ray, thank you so much for yourtime once again in the Dennis
Invest podcast.
Looking forward to seeing youagain very soon.
Alphabet shares are something that we need to know
about as dentists because, ofcourse, they're relevant to
company structure, which is ofcourse useful to know whenever
it comes to deciding how we'regoing to structure our dental
practices or certainly any otherbusinesses that we might hold
long term.
And that's why I'm joined todayby Mr.
Ray Goodman of Ecuador.
We're going to be talking aboutalphabet shares, what they are,
(02:03):
how we can use them, what weneed to know in order to get the
most out of them, and how wecan stay safe out there whenever
it comes to our businesstransactions.
Looking forward to this podcastas ever.
As ever, you can claim your CPDfor this episode within the
official Dentists who investSmart Money Members Club.
Smart Money Members Club alsoincludes multiple mini courses
and webinar series on financefor dentists, including how to
(02:25):
become as tax efficient aspossible as well as
understanding investing.
All of this content counts asverifiable CPD, and you can
download your certificates thereand then upon completion of
each lesson.
In addition to this, we alsoinclude a whopping 10% discount
on your dental indemnity and a5% discount on lab bills for
dental principals, amongst otherperks and discounts for
(02:46):
members.
Please use the link in thedescription to claim your
verifiable CPD for this episode.
Welcome to this slightlyimpromptu live broadcast by
myself and Mr.
Ray Goodman of Acuity Law.
We're here today to talk aboutsomething that confuses the
absolute heck out of Dennis,probably because no one ever
(03:08):
really explained it to us and wenever had the opportunity to
learn.
So we're here to write thatwrong, so to speak, today, by
discussing alphabet shares,company structure, and
shareholders agreements, whichis hyper relevant to us dentists
and our business dealings and,of course, our dental practice
and other business intereststhat we might hold.
Ray, do you think that's a goodintro?
If you're happy, should we jumpstraight in?
Ray (03:30):
That's absolutely fine, James.
Dr James (03:32):
Brilliant.
So Ray has Ray has pres createda presentation on this topic
today.
So Ray's going to be sharinghis screen any moment now.
Just while Ray is getting thatup, there will of course be two
channels that people will belistening to this content on.
It'll either be on the DennisInvest Facebook group, the video
uh itself, or as well as that,uh it'll be on the Dentists Who
Invest podcast platform.
(03:53):
So we're gonna do our very bestto be as descriptive as
possible visually of the slides.
If you can't see the slides forwhatever reason and you'd like
to, the video is gonna be on theDentists Who Invest Facebook
group.
Cool.
All right, brilliant.
So we can go ahead and jumpstraight in.
I see Ray has got hispresentation up on the screen.
This stage is yours, Ray.
Ray (04:12):
All right, thanks, James, and uh welcome everybody um to
today's session on alphabetshares for um dental companies.
Um in this episode, we're goingto break down what alphabet
shares are, why they exist underUK company law, uh, and how
they're actually used in realdental businesses, particularly
groups that own multiplepractices.
(04:34):
It's it's practical, notacademic.
Um, and everything we covertoday is taken from structures
that that you can actually uhsee in real transactions.
Um so um here's what we'regonna cover.
Um, firstly, we're going toexplain what alphabet shares are
in plain English.
Then we'll look at the UK legalframework, especially articles
(04:59):
of association and shareholdersagreements.
Uh, and then finally, we'llwalk through worked examples uh
showing how uh dental corporatesactually use alphabet shares in
practice.
Now, I know alphabet shares isnot a uh uh a term that is uh
used every day by by mostdentists, but it is something
(05:22):
that that a lot of you will haveheard of.
Um perhaps some uh some of youraccountants 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 anygreat academic detail.
Um we don't need to do that atthis stage, but just to give you
(05:47):
what the possibilities are,what they are, and uh why
they're used.
So, firstly, what are alphabetshares?
Um, well, simply alphabetshares are different classes of
shares uh within the samecompany, um, usually named A
shares, B shares, C shares,etc., hence why they're called
alphabet shares, um, and so on.
(06:09):
They don't have to be called A,B, and C shares or E, F and G
shares.
Um, you can, if you want, callthem anything you like.
You could call them class one,class two, class three, but they
tend to be um A, B, and Cshares, or D, E and F shares, or
what whatever.
And it's just a way ofidentifying the different
(06:30):
classes of shares that havedifferent rights.
Um, and they're generally usedin very broad terms, and we'll
look at that in a bit moredetail in a moment, uh, to
tailor control and the economicsum of the the company.
So, firstly, um why use them?
Why why do companies havealphabet shares?
(06:53):
Well, in general terms, itallows you uh control without
full ownership.
Um and it's that they use tosolve very real problems.
Founders may, for example, wantto raise money but retain
control.
Key managers may need equityincentives, and investors may
(07:17):
want financial returns withoutoperational involvement.
And alphabet shares let youseparate economic reward from
decision-making power, andthat's the key thing theme
running through this.
So, for example, um, if um if adentist wants to sell part of
(07:37):
his practice or grant shareseffectively in that practice,
but doesn't want to grant giveaway full ownership, this is a
possible way of retaining umcertain aspects of troll
control, but perhaps not others.
Um it in it's it's it's avehicle that enables um dentists
(07:59):
uh to attract investors.
Um it's it's a way of possiblyrewarding management, uh, it's a
way of possibly managingsuccession uh of the ownership
of the company, or to distributeshares amongst family.
For example, in relation to thelast one, um, some people who
incorporate their practices,i.e., transfer it into a limited
(08:23):
company, um, do so uh wholly orpartly so that they can shed,
they can spread the sharesaround amongst their family, um,
as perhaps part of inheritancetax planning, uh, or perhaps
simply to reduce the income taxbill and utilize the annual uh
allowances for for other membersof family, you know, sons,
(08:49):
daughters, etc.
But perhaps, whilst wanting touh to utilize those benefits,
wants to retain the control ofthe company and the running of
the practice.
Uh and this is a way ofpossibly doing that.
So the UK legal framework um isset out in the Companies Act
(09:09):
2006, and the Act allowscompanies to issue multiple
classes of shares, but insistson clarity and fairness.
Um so if you create differentclasses of shares, the rights
attached to them must be clearlydocumented and properly
approved.
Uh and you can't be casualabout this because the law takes
(09:34):
share rights uh very seriously.
And the rights are generallyset out in the Articles of
Association, which is, if youlike, the company's
constitution.
Um the Companies Act 2006actually sets out in one of its
annexes, and we'll have a quicklook at that in a moment, um, a
(09:55):
specimen form of articles, whichin reality the vast majority of
UK private companies adopt.
And they used to be calledtable A articles.
From 2006, they're called themodel articles.
And if you don't uh make anychanges to them, that is the uh
(10:17):
form of articles that will applyto your company.
So often when when uh lawyersor accountants form new
companies for clients, dentistsor otherwise, they'll either
leave the articles as they are,or which is more general,
they'll make specific changes tothe um to the model articles.
(10:37):
Of course, in somecircumstances, we'll draft
completely new articles.
There's no obligation to adoptthe model articles, it's just um
easy and and and effective.
And and most of the terms inthe model articles fit the
majority of sort of standard UKcompanies.
But if you want to startchanging share classes, adding
(10:59):
different shares, then um wewould either alter the uh model
articles or produce completelynew articles.
So, articles.
Um critical document, as Isaid, it's the company's um
actual constitution, sets out umall the rules and regulations
(11:22):
in relation to the uhconstitution and and and and the
uh compliance of the company.
Uh and within that the shareclasses will be defined.
Um so if you've got alphabetshares, all of the details
regarding those differentclasses of shares will be
contained in the articles ofassociation.
(11:44):
If you've already got a companyand then you want to adopt this
type of structure with withalphabet shares, different
classes of shares, then theorartical amending.
Uh not a very complexprocedure, but has to be done by
somebody who knows what whatthey're doing.
(12:05):
In general terms, it normallyrequires um a special resolution
to amend the articles, um, andthat will require a majority of
75% of the shareholders.
If you've got different classesof share and you plan to change
uh the class rights, i.e.
the rights of that particularclass, then 75% of the holders
(12:29):
of that class uh have toconsent.
So you have to give it somethought how you structure this
before you before you go intothis sort of structure, because
further down the line, if uh anevent happens that requires you
to change that structure or disor dispose of those shares, um,
it can become more complex.
(12:51):
And always remember that thearticles of association are a
public document.
Um, they are available foranybody to see uh by searching
the record of the company atcompany's house, which uh
anybody can do.
So what are the what mustarticles contain?
Well, um, when a company's gotmultiple share classes, the
(13:13):
articles must specify the votingrights.
Uh, how much how many voteseach share holds.
Now, you would think that everyshare has a has has a has one
vote.
That's not the case.
You can stipulate that the Ashares have three votes, five
votes, ten votes, and the Bshares hold one vote.
(13:35):
You can also have non-votingshares.
So you may want, um, as aprincipal, you may decide to uh
retain all of the voting shares,but grant other classes of
shares to your family orinvestors, which give them
rights to participate in theprofits, uh, to receive
dividends, and rights toparticipate if the company's
(13:57):
wound up.
Um, you could also add uhprovisions as to what happens if
the company's sold.
Uh, there are things called umdrag-along rights and tag-along
rights, um, which um enable umone class of shareholder,
perhaps those with the votingshares, to drag along all of the
(14:19):
other shareholders if the umvoting shareholders decide to
dispose of the company.
So you you you you avoid asituation where perhaps
non-voting shareholders couldblock um a deal that you, as
principal, have decided is theright thing for you and for the
(14:39):
company.
Um the next thing that thatwill be set out in the articles
would be the dividend rights.
Not all shares, as I've justsaid, not all shares would
necessarily participate at allin dividends.
And others may have differentrights to receive dividends in
different circumstances.
So you can, for example, havepreference shares.
(15:00):
They would have a preferentialdividend before the
non-preferential shares.
So if you've made, say, ahundred thousand pounds profit
and you've got a class ofpreferential shareholders uh
that have a right to uhparticipate in the first hundred
thousand pounds worth ofshares, sorry, uh of profits,
(15:22):
then they are eligible toreceive that first hundred
thousand pounds of profitsbefore the non-voting, the
sorry, the non-participatingshares uh receive anything.
Um capital rights.
Well, capital rights are whathappens on a sale or winding up
of the company.
Again, I've seen companies withwith uh classes of shares that
(15:47):
don't participate at all in theprofits, um, aren't entitled to
receive dividends, but arepreferential in terms of winding
up.
Now, those shares could also beum could also bear a coupon.
So you they could um not haveany rights to participate in
(16:08):
profits, uh i.e.
receive dividends, but they maybe entitled to a fixed coupon
each year like interest.
Um it's not technicallyinterest, but it's effectively
the same thing.
So they may be entitled to a a5% um preferential payment each
(16:29):
year um before they participate,before any of the dividends and
before they participate individends.
And you can get fairly complexstructures where different
shares uh are entitled topreferential payments either of
a of a fixed uh coupon orpreferential um uh participation
(16:53):
in profits up to a certainlevel, and then another share of
another class of shares kick inafter that, and then the first
class kick in um after a furtheruh uh uh ceiling has been uh
reached.
So it can get fairlycomplicated.
Um and and finally, classprotections.
Well, class protections is uh areference to protections um of
(17:19):
the rights of minorityshareholders.
The Companies Act does haveprovisions in that protect
minority shareholders from beinguh effectively um abused by
majority shareholders.
Um it that it does provideprovisions that if um the
majority is being unfair um andunreasonable to minorities, that
(17:42):
um that they can have a rightto petition the court.
Um but but it's far betterrather than get to that
situation to make sure that anyany required protections are
enshrined in the articles ofassociation to avoid any
disputes of that of that length.
Um so that is broadly whatarticles will uh will contain.
(18:09):
Now, this is just a snapshot ofthe index to the model articles
which are annexed to um theCompanies Act 2006, and you can
see without spending too muchtime on it, it sets out um
directors' powers andresponsibilities, um, decision
(18:32):
making, how the directors are toconduct the process of decision
making, um, appointment ofdirectors, and then uh shares
and distributions.
Sorry, I've just uh skippedforward.
Um and all the rules can allthe rules relating to how the uh
(18:54):
to the different types ofshares and how the company is to
be run um and uh and achievecompliance um are to be
conducted.
Uh this isn't an exhaustive uhindex, it's part of the index,
but it's just there to give youa flavor of the sort of things
that will be in your articles ofassociation.
(19:16):
If you've already got a limitedcompany, you will your company
will have articles ofassociation, whether you've ever
seen them or read them or not.
Uh and if you're curious, youcan go on if you haven't got a
copy or um you can get a copyfrom your accountants or
lawyers, but you can also go onto Company's House and do a
search.
You do um a beat that there isa free search facility now on
(19:39):
Company's House Direct.
You can read the articles.
Um, I don't know that many ofyou would want to do it.
If any of you are insomniacs,it's probably a great way of
getting yourself to sleep atnight.
Um, but otherwise, if you'vegot any queries, speak to uh
speak to your accountants orspeak to uh uh uh suitably
qualified uh corporate lawyers.
So um what happens if you wantto change your share classes?
(20:03):
So let's assume you've got acompany um it's got broadly
standard um um uh articles um asper the the the the the the um
the standard articles.
Um and as I said before, wewant to change the situation
(20:25):
from having say a a 100 poundshare capital of one pound A
ordinary shares, and we want tocreate some new uh uh classes of
shares.
Um well the first thing is asyou've probably gathered, you
can't just change them byagreeing uh with with your
shareholders in the pub.
(20:46):
Um introducing new shareclasses or changing existing
rights will normally require aspecial resolution, and as I've
already said, that's a 75% uhresolution of all of the
shareholders if there's only oneshare class, or if you're
changing the class rights of aparticular share um uh share
(21:08):
class, then you'll need 75% ofthe holders of those shares.
Now, again, there are certaincircumstances where you might in
your articles um change thatand make provisions that to
change um to change the rightsof a particular type of share or
to change rights in aparticular type of way, um,
(21:30):
there is a different process,and you might need a hundred
percent or or fifty percent.
Um at the end of the day, it'syour company.
Um, and it's a matter for thedirectors uh and the
shareholders to decide how thatcompany is to operate and what
(21:51):
uh steps are to be taken andwhat what the articles are to
say.
There are some um provisionswhich which you can't change uh
because they would fly in theface of the provisions of the
Companies Act.
So overall, before taking anysuch steps, you need to get
proper advice.
(22:12):
Um we at Acuity have have awhole team that that deal with
this sort of thing.
Um we have created many of thestructures for a lot of the
bigger corporates.
Um we act for several of thelarger corporate uh uh dental
providers uh and have createdthe structures for them.
(22:32):
And any of them, uh any of youwho have uh sold practices to uh
some of the bigger corporatesuh will will know that some of
them have quite complex sharestructures to allow them, as
part of their acquisitionpolicy, to issue uh different
classes of shares to the sellersto enable those sellers to get
(22:55):
additional consideration if theyhit certain targets.
It could be targets as toturnover, it could be targets as
to profit.
Um uh they also um may includeprovisions.
I know the old Dentex um uhshare structure, which which
which I did many, manytransactions on and were very
(23:16):
familiar with uh super complexuh deal uh documents.
This was the the old Dentex uhuh the old Dentex setter before
the uh uh they merged with uhPortman.
It's far more simple now.
But the old structure had alldifferent types of share, um,
(23:39):
which had all sorts of differenttypes of of uh of writing.
And and their documents werevery, very complex.
But in order, if you decide youwanted to change your share uh
structure uh to includedifferent classes of alphabet
shares, then this is what youhave to do.
Generally, a specialresolution, i.e., a 75% majority
(24:01):
of voting shares.
Now we talked about articles,and the articles do set out the
the um uh the constitutionalprinciples of the company.
Um having said that, um, if youare going to have a uh a
(24:22):
situation where you've got morethan one class of shareholder,
um, or in fact, even if you'vejust got more than one
shareholder, then it's almostalways advisable to also have a
shareholders' agreement.
Um, and that sits alongside uhthe share the articles.
It's not a legal requirement tohave a shareholders' agreement,
(24:45):
as it is with articles, um, butit is best practice.
Uh, in the same way as if youare not a limited company and
you are in a partnership or anexpense sharing agreement, um,
you would always be best advisedto have either an expense
sharing uh agreement if it's anexpense share or a partnership
agreement if you're apartnership, to set out more of
(25:08):
the day-to-day running uh uhprinciples of the company.
So a shareholders' agreement isnot a statutory requirement,
it's a private contract.
And it sets out the commercialterms um agreed between the
parties.
So whereas the articles definethe legal rights, the
(25:28):
shareholders' agreement uh moredefines how shareholders
actually uh behave um betweenthemselves, and it's very much
more a commercial uh document.
It is possible that some of theof the uh principles in the
shareholders' agreement willcross over um into uh the
(25:51):
articles.
And there are some terms thatcould be in the articles or they
could be in the shareholders'agreement.
Uh it's important in thosecircumstances to make sure that
you don't have conflicting termsin the articles and the
shareholders' agreement.
Uh, and I can tell you that Ihave seen that on more than one
occasion.
Uh and it uh and on occasion,uh, I've seen it in very complex
(26:13):
um corporate structures on someof the big uh dental
corporates, when in fact umtheir their articles and the
share structures um contradicteach other.
Um and um I I won't mentionwhich companies it is, but I
have pointed that out to theirlawyers um and been told, yeah,
we know, but we can't changethem because um there was
(26:35):
another there's another firm oflawyers that deals with the uh
the the articles and we do withthe shelves agreements and um
and um just a silly situationwhich should never happen.
Dr James (26:46):
Which takes which takes precedent, can I ask?
UK dentists, Dennists WhoInvest now has an official
platform where you can learnabout finance and obtain UK
compliant, verifiable CBD at thesame time.
The only platform that existson which you can do both.
The Smart Money Members Clubhas hundreds of hours of mini
courses, webinar series, andlive day recordings on all
(27:07):
things finance slash taxefficiency for UK dentists.
This includes complete courseson how tax works for UK
dentists, finance so that youcan invest and grow your own
money, business so you canimprove your profitability as an
associate or principal, and forthose out there that want it,
there's also a mini course andhow you can responsibly enter
(27:27):
the crypto space using measuredamounts of capital.
I've gathered this content fromthe best of the best I could
find in each respective area sothat you know that this is how
people at the forefront of eachfield advise their clients.
The Smart Money Members Clubalso contains discounts on
common things that UK dentistsneed to pay for on a regular
basis.
This includes a whopping 10%discount on dental indemnity,
(27:51):
the offer to beat your incomeprotection deal no matter what
you're paying, and for theprincipals out there, 5%
discount on lab bills and 10%discount on practice insurance.
These are designed to offerhundreds, if not thousands, in
annual savings.
The purpose of this membersclub is to not only boost your
monthly income but also manageyour outgoings as much as
possible and therefore createmore profit.
(28:12):
To celebrate the launch of theSmart Money Members Club, and
given that the CPD deadline iscoming up soon, I've decided to
offer the first month of thisplatform entirely for free.
This offer will end in thecoming weeks as soon as the
current CPD cycle is up.
To collect your CPD for thispodcast episode using the Smart
Money Members Club, feel free touse the link in the description
(28:34):
of this podcast.
Ray (28:39):
Good question.
Um they are a uh a statutory umuh uh document filed at the
company's house.
Um and I I I I I I I wouldthink that uh in the absence of
agreement the articles wouldtake precedent.
Okay.
(29:00):
Um it it it's actually is it itmay be that there's a provision
in the shareholders agreementthat says that in the in in the
event of a conflict between thearticles and the shareholders
agreement, that the shareholdersagreement would take
precedence.
But it depends every everycompany has to be looked at
separately.
Um but but but the main messageis yeah, don't make sure that
(29:23):
doesn't happen, because you justyou know you've you you're just
causing problems storing up apotential problem further down
the line.
And if you need to um rely onone of the principles that that
is conflicted, you've got aproblem.
Um but it's a good question,James.
Thanks.
Dr James (29:41):
Yeah, curious, just curious, just curious.
Thanks for clearing that.
Ray (29:44):
No, it's an excellent, excellent um question.
So um key shareholdersagreement uh clauses.
Um in dental corporates, um,shareholders' agreements usually
cover things like transfers.
Um, what happens on the in theevent of a transfer?
(30:06):
So say for simplicity, we'vegot two shareholders, a
shareholder and b shareholder,each with their own rights.
Um one shareholder decides thathe wants to sell his shares to
um a third party.
What happens then?
Well, normally, um, if it's notin the sometimes it's in the
articles, but if not, it can bein the shareholders' agreement.
(30:30):
And the usual the usualprovision you would put in would
be subject to if this is agreedbetween the shareholders, that
if one wants to sell, then hefirst has to offer it to the
continuing shareholder.
And then if that shareholderdoesn't want to buy, then um the
the first the the the the thethe selling shareholder can
(30:53):
offer it to third parties.
Um there will be uh provisionsas to how those shares are to be
valued, if there's to be asale, i.e.
if um if the shareholdersagreement or the articles
provide that uh there are what'sknown as preemption rights,
(31:13):
i.e., the the the the otherclass of shareholders have the
right of first refusal, thenthere needs to be a mechanism to
decide what the figure is, whatthey're worth.
Uh and usually we provide forum each party perhaps to either
a joint appointment of a jointvaluer, perhaps uh a named
(31:35):
valuer like Christie's or FrankTaylor's, um, or provision for
uh a valuation by the company'saccountants, or uh each party to
appoint a valuer and in defaultof agreement for one to be
selected by the president of umthe BDA for the time being.
(31:56):
Lots of different ways to skinthat cap.
But the the important thing iswe have a uh a defined process
to uh agree uh the valuation onon sale.
Otherwise, you can have hugedisputes over what the shares
are actually worth.
(32:16):
Obviously, the seller is goingto argue that they're worth
more, and the buyer is gonna sayis gonna raise article, uh, is
gonna raise all whatever umarguments that he can.
For example, um if the uh ifone if if if the continuing
shareholder is a my is a umminority share is a majority
(32:38):
shareholder and the minorityshareholder is being offered,
um, there's a there's apotential argument to say, well,
actually, that a minorityshareholding is worth less
because it's a minority anddoesn't confer control.
Um so that is something thatperhaps could would be dealt
with in the shareholders'agreement to say that no
(33:02):
discount will be given um forminority holdings um or other,
you know, or or it could be saythat 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 pinneddown when you're uh
constructing your your yourcorporate uh uh uh structure,
(33:24):
your shareholders' agreement andand 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 achairman?
Um are all decisions to be madeon a simple majority of
directors?
Um, does ownership of aparticular class of share given
(33:50):
automatically uh uh uh uh adirector or more than one
director on the board?
So this is uh an area where youcan control how the board is
made of what happens if somebodyleaves or says, for example, if
somebody uh ceases to become ashareholder, they automatically
(34:14):
have been uh have designed to bemindful in terms of the board
constitution of a limitedcompany, um, of the terms of the
Dentists Act, which say anybodycan own shares in a dental
corporate.
Um, you don't have to be adentist to own shares, and you
don't even have to have adentist on um uh uh as a uh to
(34:39):
to hold shares.
So you all the shares could beheld by non-dentists, and you
don't even have to be a DCPdental care professional.
The provision in the DentistsAct says that a dental uh
limited company, a dentalcorporate, cannot have a
minority of dentally qualifieduh persons as directors.
(35:03):
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 morenon-DCPs than DCPs.
Uh, and that is oftenmisunderstood, uh, including um,
(35:26):
for example, by the GDC, um,who at one stage, and I haven't
checked recently whether it'sbeen changed, said that that a
dental corporate has to have amajority 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, butyou can't have minority.
(35:49):
And the final thing in terms ofuh key shareholder agreement
clauses is exit rights.
We touched on this a little bitbefore.
What happens if somebody wantsto leave?
And also what happens ifsomebody dies?
What happens to their shares?
So there are two terms that areoften used in terms generally,
(36:12):
actually, these the the exitrights would be dealt with in
the articles.
And there are two things thatare that are normally in the
articles provisions as to theprocedure on the transfer of a
share, which uh relates to thesituation where somebody decides
they want to sell.
Uh, and the other, uh, whathappens on the transmission of a
(36:34):
share?
Transmission referring to thesituation where somebody dies
and the shares are transmittedrather than transferred in
accordance with that person's uhwill or uh the administration
of their estate.
Dr James (36:50):
And and Ray, just a quick question.
What is the advantage of havingthese things outlined in the
shareholders' agreement versusthe articles of association?
Ray (37:01):
Um it's a it it it's a moot point.
Um as I said, uh theshareholders' agreements tend to
deal more with the day-to-daymanagement of the company, um,
but can include um these thingsthat we've just uh spoken about.
Um having said that, thearticles can also deal with
(37:25):
most, if not all, of thosethings.
And what tends to happen isthat the articles tend to deal
with the big things like umtransfers, um valuation, um
board control.
But if they don't, rather thanchanging the articles, often
(37:48):
it's easier if you just whenforming the company, you you buy
the effectively a company offthe shelf, which you can do
online in about five minutes,and it used to cost 300 quid,
uh, you can now do it for about10 pounds, um, and you get the
company with the standardarticles of association.
(38:09):
Rather than starting to do umpassing resolutions and and and
uh which then have to be filedat the company's house, and you
have to reprint the articleswith in the amended form,
sometimes just as a matter ofconvenience, it can be uh easier
just to uh include those thingsin the shareholders agreement.
(38:32):
I see.
But I mean we yeah, we we we wewe could talk about this the
particular question for for foryou know for for an hour or two
because there are differentopinions.
Uh another view would be well,a shareholders agreement is a
contractual document between theparties, whereas articles of
(38:53):
association are actually astatutory um document.
And one what once created orfiled at Company's house,
they're a matter of publicrecord, and anyone can see them.
So um there's a day, I supposethere's a slight danger if you
muck up your shareholders'agreement and it's not clear um
or for for for any reason thereare uh uh contractual questions
(39:17):
over its enforceability, um,that there's a slightly greater
risk of that with a withshareholders' agreement than
there are with articles.
Having said that, ashareholders agreement is a
private document between theparties, and you may not want to
see things like dividend policyum or or a basis of valuation
(39:38):
or who does what on a day-to-daybasis within the company um on
a public document.
You may want to keep thosethings confidential between the
shareholders, makes completesense.
Which would be a good reason toput them in the shareholders
agreement rather than thearticles.
Dr James (39:55):
Makes complete sense.
Yeah, I was just trying tofigure out what's the advantage,
I guess.
Ray (39:59):
Yeah, that the the the the there is no hard and fast rule.
There are a few things thathave to go and would also always
go in the articles.
The articles have to containcertain uh things broadly in
line with the things that we didthat that we mentioned when we
spoke to the articles.
(40:19):
But you saw Bot from the justfrom the index of the standard
articles, there's a lot of stuffin there.
Um and the Companies Actprovide that a lot of stuff, a
lot of that stuff has to be inthe articles.
So the key thing is to makesure that you don't have a
conflict between shareholders'agreement and and and articles.
And in drafting theshareholders' agreement, you
(40:41):
would normally have a clause atthe end to say that in the event
of any conflict, in case you'vecreated something by accident,
which one prevails?
Dr James (40:50):
Nice, okay, got it.
Ray (40:52):
To avoid that issue.
So um I think we've got now afairly um broad understanding of
of uh of what it's about, whatit what what alphabet shares
are.
So why would you uh why wouldyou use alphabet shares and why
(41:12):
why particularly do the largerdental groups, not only the
larger ones, but butparticularly larger uh groups
use alphabet shares?
Um you almost always uh finddifferent classes of shares in
(41:32):
the larger um corporates.
Um because you often havefounding dentists, you have
associate clinicians, you havenon-clinical management, and you
can have external investors,all with different priorities.
The external investors are inthere not because they want to
run dental practices per se, butthey're in there for as an
(41:56):
investment.
They want to see returns, andthey may say, right, we we we we
will uh uh invest X millionpounds 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 ouruh investment.
So we say, right, we we wantthree, we're gonna have um for
(42:20):
for for our million poundinvestment, we're gonna have
half a million pound in um uh incumulative uh preference shares
that have a preferred dividendof five percent.
Um, and then they participatealong with the uh uh the B
shares, which are the ones thatare held by um the original.
(42:45):
Uh and then there could beother classes of shares which
they issue to sellers um toreward to give them additional
incentive on top of the the thethe seller certain targets they
get issue um through throughthrough a shit through a class
(43:06):
of share.
Um as we said, externalinvestors, it's a it's a it's an
ideal way of rewarding externalinvestors who can limit their
risk by by um by by takingpreferential um dividends or or
a coupon.
Um and need for control.
(43:27):
Well, um it may well be thatthe uh the selling or the
existing principles, uh whilstthey're happy to have perhaps
venture capital money investedin the practice to enable them
to expand and acquire morepractices, they um they want to
(43:48):
retain control of the businessand therefore they would retain
voting control, or perhaps justvoting control on clinical
issues.
There's no hard and fast rulehere, James.
You can basically create yourown structure.
Um, and and you know, we asacuity, I know, have have
(44:09):
created very different and andquite novel structures for a
number of the larger corporatesthat uh that that are uh out
there acquiring today.
Um so let's look at some uh uhuh um quick examples.
So this slide deals with asituation where you've uh um
(44:33):
where founders want to raisecapital but they want to retain
strategic and clinic clinic andcontrol.
So that they may hold a classof shares with enhanced voting
rights, um, and the investorsreceive shares with standing
votes but prefer butpreferential economic returns, a
little bit like I was justexplaining.
Um so the investors areprotected financially, but the
(44:56):
founders retain control over thedirection of the group.
Uh, and that's a very umprivate equity friendly
structure.
Um I was going to say, but I'vealready said it that here um
pure investors can be given a recould could be given redeemable
(45:18):
preference shares um or fixeduh coupon shares um uh and
participating shares.
It it's it's a real sort offruit salad.
You can you you can create youcan create the structure that
works for your business at thatpoint.
So if you're bringing inexternal investors, you can the
(45:43):
There are ways of retainingcontrol, there are ways of
giving specific areas of controland different ways of
controlling um how the profitsare distributed.
Example two is more uh designedfor clinic clinicians
(46:08):
incentives.
So uh incentive click keyclinicians so you can as perhaps
defer to growth shares thatdon't have initially um they
could convert to um keyperformance uh uh target and uh
(46:36):
key staff shares that actuallydon't give away any of what you
would perceive as your equity uhin that you retain total
control in terms of voting upuntil a point perhaps where the
practices performing at apre-agreed level were as a
result of partially if notwholly uh on the performance of
(47:05):
that point, it is fair for thoseshares to convert into perhaps
the same shares that you'vealready got, that you're holding
your A shares or your B sordinary shares with the same
voting rights as as as yourself.
Um and that's a tool uh forretaining key clinic.
(47:27):
This uh example is more um todo with uh investors.
So um passive investors, itcould be executives who uh have
(47:48):
agreed to invest in uh thegrowth of your practice, and
they could be given non-votingshares.
So they're not involved in theday-to-day management of the
company, uh, you could give themfixed returns rather than
participating in the profits, soit reduces the risk for them.
Um, so although this is not perse a loan, it kind of looks
(48:12):
like a loan because they knowthey're gonna get a 3% reason uh
on this class of share.
Um, so you could issue themwith non-voting uh shares with a
5% preferential dividend.
So before anybody else takesanything by way of dividends,
(48:35):
they get the percentage.
Um and that can that can helpwith growth.
Um so you've got the money in,it's it it's uh coming from from
somewhere that you know, youhaven't got to get got got to go
through all the hoops of uh ofborrowing.
Um you may be in a situationwhere the banks aren't prepared
(48:57):
to lend at this point in yourgrowth profile, or if they are,
that it's very expensive.
And the bank and mum and dadhave said, well, look, we'll
give you the quarter of amillion 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 shareswhich participate in the
(49:20):
unlikely event that the companygoes bust and you know
everything has all the assetsare liquidated, you'll get your
money back first.
But in the meantime, you'll geta five percent coupon each year
before anybody else gets paidout.
And that's you know, it's it'sa pretty good way of uh funding
growth if you're in thosecircumstances.
(49:43):
So um in general terms, um youneed to be aware that alphabet
uh the creation of alphabetshares or other uh different
classes of shareholding can umcreate other issues.
(50:05):
Um I mentioned earlier in termsof what you might want to see
in your articles and or yourshareholders' agreement, uh,
bases of valuations.
Um and I reiterate minorityshareholdings can be valued at a
lower level than a majorityshareholding because they don't
(50:31):
give the right to control.
And there are arguments thatcan arise on the disposal of uh
particular classes of share.
Um those arguments arearguments that you might want to
raise with HMRC in relation toany CTT calculation.
(50:52):
Um but that but but it'simportant to consider these
things when you're creating thestructure.
Um and tax advice is essential.
Umvaluations, of course, alsoapply in terms of of provisions
as to exiting.
As uh we mentioned thatearlier.
(51:15):
So these are things that youneed to consider in the round
when you're considering what thea new uh structure is going to
be, advice as to what the effectof these things is going to be.
Um and there are also um uhother issues, and and I can tell
(51:39):
you, I I I I spoke to uh an oldclient of mine only about four
days ago who contacted me.
I acted on purchase of herpractice about uh about 14 years
ago, um, and she told me in2017, um, she shares amongst her
(52:02):
members of her family.
Um I I I I I I'm pretty surethat that that the overriding
objective was to um uh basicallyuh enable her to spread the
profits amongst the family andand uh utilize the lower tax um
(52:23):
uh position and and theirindividual tax allowances.
Um she's now uh her personalcircumstances have now changed,
uh, and there are things and andshe's contemplating selling.
So she said, you know, is thereanything I need to do?
I said, well, the first thinguh I I need to ask you is do you
anticipate any, and this iswithout me um having sight of
(52:47):
her uh articles association.
In this uh situation, there'sno shareholders' agreement.
I wasn't, and she didn't cometo us to deal with the uh uh
creation of the new uh shareclasses.
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
(53:07):
articles, I I can't advise youproperly, but um as things stand
on the face of it, your theshareholding is held not just by
you but but between yourselfand and several others.
And in the absence of any otheragreements, if you sell the
practice, the money is going tobe distributed uh between all of
(53:30):
the shareholders in proportionto the shares.
Is that what you want?
Uh and you know, in in thisparticular instance, she she
really doesn't know if that iswhat she wants, because there's
other personal changes going onand retirement and uh
matrimonial issues.
So um i i it's an interestingscenario.
Now, it may actually also be umthat there are tax advantages
(53:52):
in leaving the situation as itis, because um uh those other
shareholders are likely to havetheir own uh tax allowances.
So the overall tax liability isprobably going to be
significantly less um if shesells and the money goes uh
follows the existingshareholding.
Now, um if, however, one ormore of her family members um
(54:19):
doesn't cooperate, then she'sgot a problem.
Um because she would block thesale of the shareholders'
agreement, or unless theseparticular issues have been the
(54:42):
shareholders' agreement.
In this case we know thereisn't a shareholders agreement,
so she can do what she wants todo and what the is under her pre
uh existing regime if and whenshe does sell now, these are
(55:05):
things that Ridvised to considergoing into this.
Uh, and and it would appearthat she she she wasn't.
She used a non-dentalaccountant, um, who, for the
right reasons and probably withsignificant benefits, uh, put
her into the structure, but sheclearly didn't really understand
it, and and um no thought hasseems to have been given as to
(55:25):
what the uh what what what thelong-term position is going to
be, and particularly in terms ofwhat's gonna happen on an exit.
So the the the the the cake thetakeaway from that is all this
is great and it enables you todo what you want to do.
Uh there can be significant uhtax benefits from organizing
(55:46):
your shareholdings in particularways, but you also have to be
mindful um on provisions as toexit.
Um other common whoops, othercommon pitfalls, bad drafting.
Now, mentioned before, um I Ifound um in in in reviewing the
(56:08):
documents of um of one of thethe the the the the the big
dental corporates umhistorically the the the
shareholders agreements andtheir articles uh often referred
to provisions in each other.
Um and in particular there wasa section that that that in the
shareholders agreement that saidthat X is as defined in the R
(56:32):
the definition of X is asdefined in the Articles of
Association.
And there was no suchdefinition in the Articles of
Association.
Um now that sort of thingshouldn't happen.
So it's very important thatthese things are well drafted by
people who actually understandthem uh and know what they're
doing, because if you do getconflicts, it can cause all
(56:53):
manner of problems.
Um and there can be unclearrights.
So again, it's it's importantthat whatever rights you are
attaching to different classesof shares are very clear.
Uh and misaligned documents,again, it's uh it means that you
you need to make sure thatthere's no gaps as to what
(57:16):
you're trying to create betweenthe articles and the and the uh
shareholders' agreement, thatthe two work perfectly well uh
in tandem with each other.
So, best practice is make surethat your articles are aligned,
make sure that you plan and thatyou plan exits early.
(57:38):
So if you're thinking ofexiting your practice, selling
your shares in the next fewyears, start thinking about it
now.
Have somebody who knows whatthey're doing, uh have a look at
your articles and yourshareholders agreement if you've
(57:59):
got shares of more than oneclass, and make sure that it's
not going to cause a problem inkind of inverted commas because
uh it can't hold you to ransom.
Because uh uh there's no clearwhat happens if you want to
(58:31):
exit.
It's not an ideal situation.
Um that the continuingshareholder may want to buy the
shares, you may not want to sellit, sell them to them.
They may have a right to buythe shares, but there may not be
proper provisions in as to howthose shares are valued.
Or indeed, it may all be there,but there may also be
provisions in your shareholders'agreement or in your articles
(58:53):
that says if somebody wants tosell 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 thatis the case, that you comply
with those provisions properly.
Even if you've had a kind ofchat over a pint at some point
(59:14):
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'tworry, I'll buy your shares.
If there's a if there's aspecific provision in the
articles or the shareholders'agreement as to how rights of
preemption have to be dealtwith, deal with them properly
anyway, because it wouldn't bethe first time I've seen a
(59:35):
situation where there's been aninformal conversation, and then
six months down the line, umrelations perhaps aren't as good
as they were.
Um, there could be some disputeover valuation or timings or
whatever.
And the continuing shareholdersays, no, um, I don't accept
this.
You haven't served me notice inwriting in accordance with the
(59:58):
provisions of the shareholders'agreement.
So have somebody look at it,make sure that you comply with
any any uh requirements and doit in a timely manner.
And and finally, um the oldadage about speaking, and I hope
I've achieved that to someextent today.
(01:00:19):
KISS, keep it simple, keep itshort and simple.
Um you can create very, verycomplex structures.
And in some cases, that'sabsolutely right to do.
And if providing you've gotpeople who are expert in it,
then there's no reason not to dothat.
(01:00:39):
But just because you can have avery 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 theissues that you need it to cover
(01:01:00):
and will serve to avoiddisputes down the line.
Because all of these things arevery much uh focused on getting
it right up front to avoid whatand and generally up front
means when everybody's happy.
It's like when people go into apartnership, you know, two
(01:01:21):
dentists who are you know oldpals, been through um uni
together, decide to set up apractice 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 havemarried, there are wives
(01:01:41):
involved, um, differentconsiderations, people fall out.
Um, and if you haven't put apartnership agreement in place
at the beginning, it can be verydifficult and very expensive to
sort out once you fall themout.
If you deal with all the thingsat the beginning in a
partnership agreement, or whereyou've got an incorporated
(01:02:02):
practice in the shareholders'agreement and articles, it
avoids what can be very, verystressful and very, very, very
uh expensive problems to sortout.
So just finally key takeaways.
(01:02:23):
Um Alphabet shares can give youflexibility, um, can entail can
make sure that control remainswhere you want it to be and can
be used to support growth.
And that is it.
Dr James (01:02:43):
Thank you, Raven.
Ray (01:02:44):
So I hope that was useful.
Um I I I I suspect it'sprobably not stuff that most
dentists have um heard before,uh, but it's something that's
very relevant.
And um if nothing else, givesan awareness.
I hope I've given you anawareness of the possibilities,
(01:03:04):
the practicalities, and thereasons why um with a limited
company you would you shouldalways have a shareholders
agreement.
And um by creating differshareholdings with different
class rights, whether you callthem A, B, C, D, E, F or you
know, black, white, green,yellow, blue, um, it really
doesn't matter.
(01:03:25):
Um, but generally they're knownas alphabet shares.
And when people talk aboutalphabet shares, that's what
they're talking about.
Dr James (01:03:32):
Right.
Thanks so much.
Yeah, that was a reallycomprehensive um cover of
alphabet shares and how they'rerelevant to Dennis.
And just one more thing.
The only thing that remains isto shout out uh the firm that
you represent, which is AcuriaLaw, of course.
So uh any questions, queries,anything of that nature that
might be relevant um to thiscall or might be relevant to
(01:03:53):
this this podcast, rather.
Uh Ray has just kindly put hisdetails on the screen just then
and also a q a QR code for thosewho wish to connect with him.
Uh Ray Goodman at acurie law,www.acurilaw.com.
Ray, thank you so much for yourtime once again in the Dennis
Invest podcast.
Looking forward to seeing youagain very soon.
Popular Podcasts
Joy 101 with Hoda Kotb
Joy is essential. And it's also elusive. You can't order it, borrow it, or simply hope it into life. But now, there's a new and exciting way to start your journey toward a more joyful existence: The Joy 101 Podcast with Hoda! Best known for her Emmy-winning work and co-anchoring Today, Hoda Kotb infuses her authenticity, curiosity, and warmth into conversations with the world’s most fascinating people. Entertainment legends, sport icons, wellness experts, and everyday folks will share how they find, allow, and experience joy. Hoda will offer her own tips and takes on seeking a more balanced, harmonious life. If you're craving inspiration, support, and useful tools to maximize your joy, tune in to these candid, uplifting, and moving on-air chats. Joy after a breakup, joy as an empty-nester, joy after loss, joy as a caretaker — Hoda's new podcast will speak to you. Joy 101 with Hoda Kotb, an iHeartPodcast.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com