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As a business owner, you may want to issue shares in your company. This can be an excellent way of raising funds, which will allow you to invest in increasing your company’s profits. There are different types of shares, which usually give the holders different rights. Knowing your way around the type of new shares that you can issue can help you assess options in the long term. This article will explain what preference shares are in contrast to common shares. It will then outline the different types of preference shares and what they mean for shareholder rights.
What Type of Shares Can I Issue?
As a company, you can order different types of shares. There are two common types: ordinary shares and preference shares. Ordinary shares are sometimes known as common shares. The key difference between ordinary and preference shares is what happens in the case of insolvency.
Ordinary shares are the standard type of shares that you would get. They come with certain rights. Some typical rights include:
- rights to vote at shareholder meetings;
- the right to receive dividends; and
- the right to receive a cut of the capital raised from insolvency (if the company becomes insolvent).
Preference shares (sometimes called preferred stock) will also come with these rights. However, the critical difference is that preference shareholders receive dividends before ordinary shareholders. In other words, preference shareholders have priority in dividends to common shareholders. This is important if the company ever becomes insolvent.
Issuing preference shares to certain shareholders can incentivise them to invest in your business, especially if they are an institutional investor and you are an emerging company. In addition, this can make them less worried about the potential risks of not getting their money back.
What Are the Different Types of Preference Shares?
There are multiple types of preferred shares that you can issue to possible shareholders, such as:
- callable preferred shares;
- convertible preference shares;
- cumulative and non-cumulative preference shares; and
- participatory preference shares.
Callable Preference Shares
Callable preference shares are preferred shares that the issuing company has the right to buy back at a fixed price in the future. This allows the company to set a cap on the value of the stock, which can be valuable if you want to control the price of your stock appreciating too quickly. It is also helpful to limit your maximum liability to preferred shareholders.
Convertible Preference Shares
Convertible preferred shares can be exchanged for common shares at a predetermined conversion ratio. For example, the shareholder will have the power to convert one preferred stock into three common stocks if the value of common shares reaches a certain point.
Cumulative Preference Shares
If your company cannot afford to pay its shareholders, the holders of cumulative preference shares will be paid everything they are owed before common shareholders.
Non-cumulative preference shares denote that a preference share does not have this cumulative quality.
Participatory Preference Shares
Participatory preference shares guarantee that if the company has a lucrative year and meets specific profit goals, the shareholders will pay more than the normal fixed dividend rate. In other words, participatory preference shareholders can receive additional profit if the company’s profits exceed a specific rate.
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Key Takeaways
As a business owner, you are likely to have to issue new shares throughout your business’s life. Issuing shares is an excellent way to raise capital for your business operations and growth.
One type of share is preferred shares. These prioritise shareholders on dividends, which can be a good way of lowering the risk involved in investing in your business. There are different types of preferred shares, which offer different benefits to shareholders. Knowing the difference between them can be a good way of deciding how to issue shares to potential new shareholders.
If you need help with preference shares, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A preferred share is a share that gives the shareholder priority over common shareholders in the distribution of dividends.
Some common shareholder rights include voting at shareholder meetings and the right to dividends.
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