When it comes to issuing shares in a company, there are various types available, each with its own unique characteristics and rights. The most common types of shares are ordinary shares, preference shares and redeemable shares. In this blog, we will explore the basis differences between these share types, helping you understand their key features and implications.
- Ordinary Shares:
Ordinary shares, also known as common shares, are the most basic type of shares issued by a company. They represent ownership in the company and typically carry voting rights, allowing shareholders to participate in decision-making processes. Key features of ordinary shares include:
– Dividends: Shareholders may receive dividends if the company distributes profits, but they are not guaranteed a fixed dividend amount.
– Capital Gains: Ordinary shareholders have the potential to benefit from capital appreciation if the company’s value increases.
– Voting Rights: Ordinary shareholders usually have the right to vote on important matters, such as electing directors or approving significant corporate actions.
– Residual Rights: In the event of liquidation or winding up, ordinary shareholders have the right to receive any remaining assets after satisfying the claims of creditors and preference shareholders.
- Preference Shares:
Preference shares, as the name suggests, offer certain preferences or priority rights over ordinary shares. These shares are often issued to investors who seek a fixed income stream or prefer a higher claim on company assets. Key features of preference shares include:
– Fixed Dividends: Preference shareholders are entitled to receive fixed dividends, which are typically paid before any dividends are distributed to ordinary shareholders.
– Priority in Liquidation: In the event of liquidation or winding up, preference shareholders have a higher claim on company assets compared to ordinary shareholders.
– Non-Voting or Limited Voting Rights: Preference shareholders may have limited or no voting rights, depending on the terms of the share class.
– Cumulative or Non-Cumulative Dividends: Preference shares can be cumulative, meaning any unpaid dividends accumulate and must be paid before dividends are distributed to ordinary shareholders, or non-cumulative, where unpaid dividends are not carried forward.
- Redeemable Shares:
Redeemable shares are a unique type of shares that can be bought back or redeemed by the company at a predetermined price or on a specific date. This feature provides flexibility to the company and may be attractive to investors seeking a defined exit strategy. Key features of redeemable shares include:
– Repurchase Option: The company has the right to repurchase the shares from the shareholder at a specified price or on a predetermined date.
– Fixed Redemption Price: The redemption price is predetermined and agreed upon at the time of issuing the shares.
– Limited Voting Rights: Redeemable shareholders may have limited or no voting rights, similar to preference shareholders.
– Dividends: Redeemable shares may or may not carry dividend rights, depending on the terms of the share class.
Understanding the basic differences between ordinary shares, preference shares and redeemable shares is crucial when considering the appropriate share structure for your company or making investment decisions. Ordinary shares provide ownership and voting rights, while preference shares offer fixed dividends and priority in liquidation. Redeemable shares provide the company with the option to repurchase the shares at a predetermined price or date. By considering the unique features and implications of each share type, you can make informed decisions that align with your business goals or investment objectives. It is advisable to seek professional advice from legal and financial experts to ensure compliance with relevant regulations and to tailor the share structure to your specific needs.
Are you starting out on a new business venture and are looking for a lawyer to assist you? Why not give one of Alexander JLO’s expert commercial lawyers a call on 020 75377000 or email peter@london-law.co.uk for a free, no obligation consultation and see what we can do for you?
This blog was prepared by Alexander JLO’s senior partner, Peter Johnson on the 22nd February 2024 and is correct at the time of publication. With decades of experience in almost all areas of law Peter is happy to assist with any legal issue that you have. He is widely regarded as one of the capital’s leading commercial lawyers and acts for small business to multinational PLC’s alike. His profile on the independent Review Solicitor website can be found Here