Types of share
In this post, I present a list of a variety of types of share. It should be noted that these are descriptions and not legal definitions. As there are no set types of share and the elements below can be mixed, it will always be necessary to refer to the articles of association of a company in order to ascertain the rights attaching to a specified class of share.
Therefore, it is important when you read through this post that you concentrate not so much on the names but on the features and rights that can be accorded to shares in general.
Ordinary shares
This is the most common form of share and usually carries a right to one vote per share held, a right to a dividend if one is declared and a right to a portion of any surplus assets of the company on a winding-up. A company may have more than one class of ordinary share, with differing rights, and perhaps differing nominal values.
Preference shares
A preference share may give the holder a ‘preference’ as to payment of dividend or to return of capital on a winding up of the company, or both. This means the payment will rank as higher priority than any equivalent payment to ordinary shareholders. Preference shares are normally non-voting.
If there is a preference as to dividend, this will be paid before the other shareholders receive anything. The amount of preferred dividend is usually expressed as a percentage of the par (nominal) value of the share. If the preference shares have been issued at a premium to their par value and it is intended that a fixed dividend will be paid based on the amount subscribed for the share (i.e. par plus premium), the share rights must expressly state that the dividend is to be calculated as a percentage of the total subscription price per preference share.
Example
ABC Limited has shares in issue which carry a right to receive a fixed preferential dividend of 4% of the par value of the shares per annum. The shares have a par value of £1 each.
Assuming that a dividend has been declared, the preference shareholders would be entitled to receive a dividend of 4p per share per annum before the ordinary shareholders receive any dividend.
XYZ Limited has shares in issue which carry a right to receive a fixed preferential dividend of 4% of the total subscription price per share per annum. The shares have a par value of £1 each but were subscribed for at a price of £1.50 per share.
Assuming that a dividend has been declared, the preference shareholders would be entitled to receive a dividend of 6p per share per annum before the ordinary shareholders receive any dividend.
It is presumed that a preference share is ‘cumulative’ unless otherwise stated. This means that if a dividend is not declared for a particular year, the right to the preferred amount on the share is carried forward and will be paid, together with other dividends due, when there are available profits. If this accumulation is not desired, then the share must be expressed to be non-cumulative.
Participating preference shares
‘Participating’ preference shareholders may participate, together with the holders of ordinary shares, (1) in surplus profits available for distribution after they have received their own fixed preferred dividend; and/or (2) in surplus assets of the company on a winding up.
As with preference shares, participating preference shares are almost always issued with a fixed dividend and can be cumulative if stated as such in the articles of association. Participating preference shares with these characteristics are generally called ‘fixed rate participating cumulative preference shares’.
Example
FE Limited has the following shareholders:
* Shareholder A, who holds 500,000 5% participating cumulative preference shares of £1 each in FE Limited; and
* Shareholders B, C, D and E, who each hold 500,000 ordinary shares of £1 each.FE Limited has issued 2,000,000 ordinary shares of £1 each, so B, C, D and E each own 25% of FE Limited’s ordinary shares. But the cumulative preference shares that A owns are ‘participating’, so that A, B, C, D and E will each be entitled to receive 20% of any ordinary dividend declared by FE Limited.
Assuming the 5% preference relates to the par value of the share and a dividend of £200,000 has been declared, that £200,000 would be distributed as follows:
1) Shareholder A would receive £25,000 from his participating cumulative preference shares (5% of his investment in the 500,000 shares of £1 each).
2) As a participating preference shareholder, Shareholder A has the right to participate in surplus profits available for distribution to the ordinary shareholders after he has received his own fixed preferred dividend.
3) As a result, the remaining amount of the dividend (£175,000) would be divided equally among all the shareholders, including Shareholder A (so each of A, B, C, D and E receive £35,000).In total, Shareholder A would receive £60,000 (comprising £25,000 from his participating cumulative preferences shares and £35,000 from his entitlement to share in the surplus profits available to the ordinary shareholders) while Shareholders B, C, D and E would each receive £35,000.
Deferred shares
These carry no voting rights and no ordinary dividend but are sometimes entitled to a share of surplus profits after other dividends have been paid (presuming there is a surplus); more usually ‘deferred’ shares carry no rights at all and are used in specific circumstances where ‘worthless’ shares are required (for example in what is known as a ‘ratchet’ provision in a private equity transaction).
Redeemable shares
Redeemable shares are shares which are issued with the intention that the company will, or may wish to, at some time in the future, buy them back and cancel them.
Convertible shares
Such shares will usually carry an option to ‘convert’ into a different class of share according to stipulated criteria.
Class rights
A company may issue different classes of share, as seen above. The rights attaching to each class are usually set out in the company’s articles of association. In relation to any type of share, you should always refer to the articles of association to find the relevant rights attaching to a share, since there are no formal, universal definitions of different types of share.
If an attempt is made to alter the articles of a company such that existing class rights are varied, the resolution in question will not be effective unless varied in accordance with provisions in the company’s articles for the variation of those rights or, where articles don’t contain such provisions, by consent in writing of holders of at least 75% of the issued shares of that class or by means of a special resolution passed at a separate general meeting of holders of that class (s.630 CA 2006). In addition, shareholders holding 15% of the relevant shares may (provided they did not vote in favour of the variation) apply to court within 21 days of the resolution to have the variation cancelled (s.633(2) CA 2006). Following such application the variation will not take effect unless and until it is confirmed by the court. The court will not confirm the variation if it feels that the variation unfairly prejudices the shareholders of the class in question.