FOCUS:: Shareholders

These carry no special rights or restrictions.  They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears).

Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.

In some cases, different classes of ordinary share may be of different nominal values – for example, there may be £1 Ordinary shares and £0.01 Ordinary shares. If each share had the right to one vote (and assuming the shares were issued at their nominal value), then the £0.01 Ordinary shareholders would get 100 votes per £1 paid while the £1 Ordinary shareholders would get 1 vote for paying the same amount.

A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.  On a winding up they will only receive something once every other entitlement has been met.

Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all.  They may also preclude the shareholder even attending a General Meeting. In all other respects they will have the same rights as ordinary shares.

The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common.

The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option.

If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.

These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year.  This is received ahead of ordinary shareholders.  The amount of the dividend is usually expressed as a percentage of the nominal value.  So, a £1, 5% preference share will pay an annual dividend of 5p. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it.  On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders.  Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).

If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves.  It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid.

By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.

Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder therefore benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.

Most companies start by just having one type of shares in the form of an ordinary share class.  These will typically carry equal rights to voting, capital and dividends.  The issue of new shares after company incorporation will generally be allotments of these ordinary shares, unless circumstances suggest a need for flexibility or varied rights.

Just as a company may issue shares in multiple share classes, there’s also nothing to stop a shareholder holding more than one class of share in the same company and thereby benefiting from the differing rights (e.g. voting or dividend entitlement) that each class offers.