Article 2.13 and Entrepreneurs Relief
This article is referring to the Articles of Association we use as the template for companies with multiple share classes.
There may be many reasons why a company might choose to have a structure which has different classes of shares, all of which classes have the same rights, save only that the articles provide that dividends may be declared on different classes at different rates (generally referred to as ‘differential dividends’).
Such shares are often called ‘alphabet’ shares, and may be called eg ‘A Ordinary Shares, ‘B Ordinary Shares’, etc.
In certain circumstances, and provided that specific pre-conditions are satisfied, when shares are sold (eg on a sale of the company), or if a solvent company is liquidated, rather than being taxed as income, the funds distributed to a shareholder who is an individual may be taxed as a capital gain (and at a lesser rate). And where such funds are taxed as a capital gain, that individual shareholder may (if certain conditions are satisfied) be entitled to claim Entrepreneurs Relief (‘ER’), reducing the rate of tax by half.
The Finance Bill published in November 2018 proposes changes to those conditions, and (amongst other changes) adds a requirement that the individual must, for 12 months (24 months, from April 2019) have been beneficially entitled to at least 5% of the profits available for distribution to the equity holders in the company.
An article permitting differential dividends might result in this requirement not being met, unless the article also sets an appropriate minimum level to any differential dividends that might be declared to any shareholder who is an individual. Article 2.13 is intended to set such minimum level, and so to preserve the potential ER entitlement of a shareholder who is an individual of at least 5% of the shares.
However, if no shareholder is an individual, article 2.13 should have no effect.
If in doubt, expert advice should be sought.