How do ordinary shares work

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Introduction Ordinary shares Non-voting shares Redeemable shares Preference shares Management shares Freezer shares and growth shares Other classes of shares Voting shares, dividend shares, capital shares Deadlock articles Changing class rights Converting shares from one class to another Introduction You may want to refer to 'Shares - an introduction' , explaining what shares are, before reading this page.

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You must agree to our use of certain cookies. Understanding preference and ordinary shares. Updated: 4th April Preference shares vs ordinary shares - What is the difference? Cumulative — If you hold cumulative preference shares, the amount of the missed dividend will roll over to the next dividend date.

If dividends are issued at this point then you will receive both amounts; if dividend payments are again vetoed then both amounts will roll over to the next date and so on. Non-cumulative — Should the company make the decision not to pay dividends for a period, this amount will not be paid at any point in the future; essentially the shareholder loses this dividend payment for good.

Jonathan Munnery Partner. Further Reading on Articles about Advice for Directors. The dangers of overtrading and how you can protect your business. To print this article, all you need is to be registered or login on Mondaq. Different rights can be attached to different classes and types of shares for various purposes such as: to distinguish voting rights in a company; to prioritize distribution of dividends and assets of a company; to issue shares to raise funds with debt features; to cater to investors who only want to invest for a specific term by issuing shares which can be redeemed in the future, allowing the investor to exit.

They are generally regarded as equity investments. By definition, a preference share is a share by whatever name called, which does not entitle the holder to a right to vote or to participate beyond a specific amount in distribution of dividend, redemption or winding up.

Preference shares can have both equity and debt characteristics, favoured by investors who have different priorities and interests to safeguard. Memorandum or articles The terms of issue of shares need not be expressly set out in the company's articles, unless different 'classes' of ordinary shares are to be created. For example, 'Class A' ordinary shares, 'Class B' ordinary shares, can be specified in the articles to create small differences between the classes. This includes allowing different dividends entitlements to each share class, or where different are to rules apply for 'vesting', share transfers, or exit valuation, etc.

The law requires that rights of preference shares must be expressly set out in memorandum or articles. Apart from rights expressly given in a memorandum or articles, preference shareholders have no other additional rights. A company may not allot any preference shares or convert any issued shares into preference shares unless there is set out in its memorandum or articles the rights of the holders of those shares with respect 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.

Voting Rights Ordinary shares by default confer on the shareholder full voting rights that enable the shareholder to participate in the decision-making process of a company. A different class of ordinary shares may be created in the articles to confer 'weighted votes' for specific matters, giving the class of shareholders additional votes over the other ordinary shares.

The articles of the company must either provide voting rights or expressly provide no voting rights on preference shares. Generally, preference shareholders are often not given voting rights, but have preferential rights in respect of its entitlement to dividends and have priority in being paid first compared to ordinary shareholders. Notwithstanding that the articles of the company may not provide for voting rights for preference shares, preference shareholders have the statutory right to vote in 3 situations: during such period as the preferential dividend remains unpaid for a period not more than 12 months from the due date of the dividend or such lesser period as the articles may provide; upon any resolution which varies the rights attached to such shares; or upon any resolution for the winding up of the company.

Payment of Dividend Ordinary shareholders receive their dividends after preference shareholders are paid. Preference shareholders receive their dividends first in priority to ordinary shareholders.

Rate of Dividend Dividends for ordinary shares are not fixed. The rate of the dividend is determined by the board of directors. The board will resolve whether or not there are available profits to enable dividends to be paid to the shareholders.

There is no obligation on the directors to recommend a declaration of dividends at a general meeting. The articles of the company may confer on preferential shareholders the right to a fixed amount or rate of dividend, subject to the availability of profits of the company.

Alternatively, the articles may confer on preferential shareholders the right to receive the same rate of dividends as ordinary shares but in priority to the ordinary shares. Cumulative Ordinary shares have no right to an accumulation of dividends from previous years.

For instance, if a company issues all of its 50 shares in the stock market and you own 30 out of them. Ordinary shares come with a wide array of benefits. Not only do you have the right to vote in the company's meetings on various matters concerned with the shareholders, but you can also claim a proportional income in the form of dividends depending on the company's performance.

Also, common shares do not carry a maturity date. Meaning your ownership in the company remains unaffected until the company decides to delist itself or when another company takes over. Ordinary or common shares are generally issued in the stock market to raise capital for the company. Even if the company wishes to issue more shares in the future, shareholders are first given the option to purchase the issued shares in proportion to your prevailing ownership through the rights issue.

This ensures that the holders' shares in the company remain undiluted. Ordinary shareholders are often referred to as unsecured creditors as shareholders are the last in line to receive dividends if any.