4.1 Classes of shares

4.1 CLASSES OF SHARES

Shares are units of ownership in a company that represent a shareholder’s proportionate interest in the company’s capital, assets, profits, and voting rights. Companies issue shares to raise capital and attract investors.

1. Ordinary shares

They are also referred to as equity capital. The holders of ordinary shares usually carry the main risk of business as they invest their money without assurance that they will be paid interest on their investment. Holders receive dividends out of profit as determined by directors and declared by members in the Annual General Meeting. Ordinary shareholders are entitled to the following rights which are not available in respect of other shares:

(i)After providing for any other dividend, which is payable on preference shares, the whole of the remaining profits can be available to them by way of dividend if they so wish.

(ii)They are entitled to control the company by use of voting rights at the Annual General Meeting.

(iii)During winding up ordinary shareholders are entitled to the entire residue after payment of the company’s liability.

(iv)They receive dividend at variable rates based on the discretion of directors and availability of profits.

2. Preferred Shares

They carry preferential rights in relation to other classes of shares. The rights relate to dividend and right to receive proportionate parts of capital during winding up. The rights on preference shares may be stated in the Articles of association. As regards their priority entitlement, the following features must be observed:

(i) The right to receive a dividend at a specified rate usually fixed by the terms of issue or the Articles.

(ii) The right to receive dividends before any other class but not a right to compel the company to pay dividends if it fails to do so.

(iii)The right to receive dividends is assumed to be cumulative unless otherwise stated.

(iv) If a Company which has arrears of unpaid dividends goes into liquidation, a preference shareholder ceases to be entitled to the arrears of the dividends unless the dividend had been declared and not paid or the articles provide for payment for such arrears.

(v)Holders of preference shares are not entitled to participate in any surplus dividend over and above the specified rates.

Preference shares have various sub-types; they are as follows:

1. 1. Non-cumulative preference shares
   2. Participating preference shares
   3. Non-participating preference shares
   4. Convertible preference shares
   5. Non-convertible preference shares
   6. Redeemable preference shares
   7. Irredeemable preference sharesCumulative preference shares 
   3. Non-voting shares

   Non-voting shares are a class of shares that do not carry voting rights or have limited voting rights. Non-voting shareholders participate in the company’s financial benefits, such as dividends and capital appreciation, but do not have a say in the company’s decision-making process.

   Non-voting shares are often issued to investors or employees as a way to provide economic ownership without granting voting power.

   4. Redeemable shares

   Section 520 provides that a company may issue preference shares which are liable to be redeemed. This is only possible under the following conditions:

   (i)The company must have shares which are not redeemable e.g. Ordinary shares

   (ii)Issue of redeemable preference shares must be authorized by the articles

   (iii)The shares must be fully paid at the time of redemption.

   (iv)Money required for redemption must be from either the proceeds from a fresh issue of shares made for the purpose or out of accumulated profit.

   (v)Any premium on redemption must be provide out of profits available for distribution or out of the share premium account.

   (vi)Redemption of preference shares should not be taken as a reduction of the Company’s authorized share capital.

   (vii)Within one month of redemption notice of the number of shares redeemed must be given to the register.

   5. Founder’s shares

   Founder’s shares are a class of shares issued to the founders or early-stage investors of a company.

   These shares often carry special rights, such as enhanced voting rights or preferential treatment in the event of a sale or liquidation of the company.

   Founder’s shares are typically issued to align the interests of the company’s founders with the long-term success and control of the company.

   6. Class-specific shares

   Some companies may create specific classes of shares to cater to particular groups of investors or to meet specific needs.

   Class-specific shares may have unique rights, preferences, or restrictions not found in other classes of shares.

   For example, a company may issue class-specific shares with special dividend rights, conversion rights, or restrictions on transferability.