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The Life of a Company

Special Types of Share Structures

Classes of Shares

The two main rights normally associated with shareholdings are the right to vote on the company’s affairs and the right to dividends paid out of company profits.

Some shareholders are more concerned with control (voting rights), while others are more interested in their return on investment (rights to dividends). It is for this reason that companies are permitted to create different classes of shares, and to distinguish between voting and non-voting shares.

The two most common types of shares are ordinary and preference shares. Ordinary shares entitle the holder to a share in declared dividends and normally provide voting rights for the holder.

Preference shares are a more complex type of share. They generally have two main advantages in that they often carry the right to a fixed annual dividend, normally calculated as a percentage of the nominal value of each share. This dividend is guaranteed , and in the event of the company not having sufficient distributable profits to make the dividend payment, the entitlement can be carried forward until such time as there are sufficient funds available to make the payment. Secondly, on a winding up of the company, preference shareholders may rank above ordinary shareholders in having their investment repaid to them.

Normal practice however is that preference shares do not usually carry voting rights, and they often have dividend returns fixed at a pre-ordained level. In good times, this may result in ordinary shareholders receiving better dividends than preference shareholders. As a means of counteracting this, preference shares may have an additional “participation” right, which means that they would participate in the same rights that ordinary shares carry, without losing their preferred rights also. Rights of participation are not compulsory and should be negotiated along with all other rights between the shareholder and the company.

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