CLASSES OF SHARES
The rights and interests attached to these persons’ shares are known as class rights. Where there is only one (1) class of shares, the rights are simply called shareholder rights rather than class rights because there is no other class to compare with.
Class rights
The share capital of a company may be divided into a number of different classes, each conferring different rights on their respective owners. The rights and obligations which accrue to a particular class of shares may be provided for in the company’s constitution. The significance of the different classes of shares lies in the rights accruing to each class to vote, to receive dividends and to receive capital and any surplus assets in the event of winding up. There may potentially be many classes of shares, as the rights accorded to each are determined by agreement between the company and the subscribers. However, it is possible to identify the common classes of shares as further described below.
Ordinary shares
Generally, most companies issue ordinary shares. Ordinary shareholders are commonly entitled to their dividend after preference shareholders. A full right to vote is usually given to ordinary shareholders by a company’s constitution and the ordinary shareholders usually exert the largest amount of control over the company. In the event of a liquidation, ordinary shares rank for repayment after all other liabilities of the company.
Preference shares
Preference shares confer some preferential right on their holders. These normally carry rights to a fixed and (sometimes) cumulative dividend which is payable out of profits in priority to dividends on ordinary shares, and to a return of capital in the event of a winding up. Preference shares may be preferred also as regards to the distribution of assets upon dissolution of the company. A company may not issue preference shares unless its constitution sets out the rights of the holders of those shares as to: · repayment of capital; · participation in surplus assets and profits; · cumulative or non-cumulative dividends; · voting and priority of payment of capital; and · dividend in relation to other shares or other classes of preference shares. Preference shares usually have no voting rights in a general meeting. However, voting rights may be made contingent upon failure to pay dividends on preference shares for a certain period where such preference share was issued after 15 August 1984 but before 3 January 2016. Shares issued after this period will have certain rights as provided in the company’s constitution. The Companies Act does allow that every preference shareholder shall hold the right to vote on a resolution to wind up the company or a resolution to vary the rights attached to such preference share and conferred on the shareholder.
Participating preference shares
Preference shares may carry the right not only to receive a dividend at a specified rate but also to receive a further dividend if any surplus profits remain after a dividend has been paid to ordinary shareholders, and may also carry rights with respect to surplus assets in the event of a winding up of the company. These shares are known as participating preference shares.
Cumulative or non-cumulative preference shares
Cumulative preference shares entitle the shareholder to a dividend at a fixed rate throughout the entire life of the company. If there is a fall or absence of profits in one (1) year and the full rate of dividend cannot be paid, this deficit is made up in later years. Non-cumulative preference shares entitle the holder to a dividend at the fixed rate only in the years in which the profits enable a dividend of that rate to be paid. Failure through a fall or absence of profits in one (1) year, to pay the fixed rate of dividend does not carry the obligations to meet the deficit in the next year(s).
Redeemable preference shares
Redeemable preference shares are those which either give the holders of the shares the right to be repaid their capital at a specified date or alternatively give the company the right to repay the capital after a specified time (for instance, giving a notice of redemption) or within a specified period. The general principle that a company may not reduce its capital is not breached by the redemption of redeemable preference shares because the Companies Act states that such redemption shall not be taken as reducing the amount of share capital. The shares to be redeemed should be fully paid up. Redeemable preference shares may be redeemed out of the proceeds of a fresh issue of shares. If they are not redeemed in this way, they may be deemed out of the capital of the company provided the directors of the company have signed a solvency statement in relation to the intended redemption of shares. Upon redemption, the company should lodge details of the redemption with Accounting and Corporate Regulatory Authority (ACRA), along with the solvency statement where appropriate.
Convertible preference shares
These shares will typically carry the right to a preferred fixed dividend for a particular term, and then either allow for or require conversion into another class of shares (normally ordinary shares) at the end of the term. The conversion ratio, ie the number of ordinary shares that will be received in exchange for the preference shares, will usually reflect the value of the ordinary shares in the company at the time of the conversion.
Non-voting shares
Non-voting (or restricted voting) shares are shares with no (or very limited) voting rights attached to them. As compensation for giving up their voting rights, holders of non-voting shares usually get preferential treatment regarding dividends (fixed dividend or increased dividend compared to ordinary shareholders). A company’s constitution will often set out the manner in which the rights of particular classes are to be protected. For example, reg 8 of the Model Constitution requires a seventy-five per centum (75%) majority of holders of the issued shares of that class to consent in writing, or pass a special resolution at a separate general meeting of holders of that class of shares, to approve a variation of their rights. In relation to preference shareholders, their right to vote on a resolution to vary their class rights is a statutory entitlement.
Regulation 9 of the Model Constitution reinforces this by stating that the rights conferred to holders of any shares or class of shares (issued with preferred or other rights) shall be deemed to be varied by the creation or issue of further shares ranking equally with the shares of that class, unless otherwise expressly provided by the terms of issue of the shares of that class.