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Different Types Of Share Classes Explained

Posted by Corplaw Admin on Dec 10, 2013 9:30:00 AM

Niall Quinn Different Types Of Share Classes ExplainedIrish companies can have many types of share classes by setting out those classes and the rights attached to each class in their memorandum and articles of association. There are no legal definitions of such classes and shares with the same name may have different rights in different companies. If a company has only one class of shares they will be ordinary shares and will carry equal rights.

The following are descriptions of some typical classes of shares.

1. Ordinary Shares

Ordinary share capital is the capital that is received or given by the owners of a business in exchange for shares. The directors must decide whether to declare a dividend out of the companies' distributable profits. Ordinary shares usually rank after preference shares (see below) for the purpose of dividends and returns of capital but carry voting rights not normally attributed to preference shareholders. Companies may also decide to divide their ordinary shares into "A" and "B" ordinary shares with different rights attached to each. For example, class "A" could have all the voting rights and class "B" could have all the dividend rights.

2. Preference Shares

Preference shares typically carry a preferential right to a fixed dividend and usually rank higher than other share classes in the event of a winding up. The fixed rate of dividend is normally expressed as a percentage and the dividend is normally cumulative, unless stated otherwise. This means that should a company fail to pay a dividend it will accrue to the shareholder and become payable on the next payment date. The shares typically carry no voting rights nor do they carry further rights to participate in profits beyond the applicable dividend rate. These rights are generally set out in the company's memorandum and articles of association.

3. Redeemable Shares

Provided a limited company's articles permit, a company may issue shares which can be redeemed by the company at their nominal value at some stated date in the future or at the directors' discretion, provided that there are sufficient distributable profits available. Section 210 (4) of the Companies Act 1990 provides that no shares shall be converted into redeemable shares if, as a result of the conversion, the nominal value of the issued share capital, which is not redeemable, would be less than one tenth of the nominal value of the total issued share capital of the company. Redeemable shares offer a certain level of protection to the investor and allow control of the company to revert to those who controlled the company before the investor joined.

4. Founder Shares

These are sometimes issued to the founders of a company and usually carry enhanced rights over other classes of shares, such as increased voting rights or an entitlement to surplus profits over a specified period. However, in practice, the issue of such shares is extremely rare.

5. Deferred Shares

Deferred shares commonly carry few rights. As their rights are deferred to the ordinary shares they usually carry no right to vote or participate in a distribution.

Reasons For Creating Different Share Classes

Common reasons for creating different share classes include confining control of companies to certain individuals, offering shares with preferential dividend rights so as to encourage investment or to have different entitlements to the payment of surplus funds on the winding up of the company.

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Topics: Ireland, Corporate Governance, Shareholders, Shares