Ordinary shares, redeemable shares and preference shares are different classes of equity that carry distinct rights over control, dividends and exit. For your business, choosing the wrong share type can dilute control, increase investor obligations or create costly disputes, particularly when raising capital or structuring ownership. Ordinary shares typically carry voting rights and residual profits, preference shares offer priority dividends, and redeemable shares can be bought back on agreed terms.\u00a0 This article explains the differences between ordinary, redeemable and preference shares and how each affects your company\u2019s structure and risk profile.<\/p>\n\n\n\n
A company\u2019s share capital refers to all the shares across all the different classes issued to shareholders. This will usually be contained in a current statement of share capital. This document is one that your company will have to update from time to time with Companies House<\/a>. <\/p>\n\n\n\n It is important to note that share capital is different from a company’s market value. While share capital represents the total nominal value of issued shares, market value is determined by factors such as the company’s performance, assets, and market conditions. For example, a company might have a share capital of \u00a3100,000 (100,000 shares at \u00a31 nominal value each) but a market value of millions if it is highly successful.<\/p>\n\n\n\n A company\u2019s statement of capital is a snapshot of the company at a certain point in time. It will include the following information:<\/p>\n\n\n\n You will need to update the statement of capital in certain circumstances, including:<\/p>\n\n\n\n A class of shares<\/a> refers to a group of shares. Those shares give owners or shareholders the same rights as anyone else holding the same group of shares. Put another way, all shares of the same class must give the same rights to the shareholders of that class of shares.\u00a0<\/p>\n\n\n\n If the rights attached to one group of shares differ in any way from any other group, these shares are of a different class. When creating different classes of shares, it is crucial to clearly define the rights and restrictions associated with each class in the company’s articles of association. This helps prevent future disputes and ensures all shareholders understand their entitlements. For instance, you might specify that Class A shares have voting rights while Class B shares do not, but Class B shares have priority for dividend payments.<\/p>\n\n\n\n The most common classes of shares include:<\/p>\n\n\n\n Interestingly, the law does not define these various classes. Instead, they are more about art in the business world.<\/p>\n<\/div>\n\n\n\n If your company\u2019s shares give all the shareholders the same rights, these shares are \u201cordinary shares.\u201d It is common for companies to issue ordinary shares at their time of incorporation. <\/p>\n\n\n\n Likewise, ordinary shares typically give the shareholder the right to:<\/p>\n\n\n\n It is worth noting that while ordinary shares are the most common, they can be further subdivided. For example, a company might issue ‘A’ ordinary shares and ‘B’ ordinary shares, each with different voting rights or dividend entitlements. This allows for more flexible ownership structures and can be helpful in scenarios such as family businesses or when there are multiple co-founders.<\/p>\n<\/div>\n\n\n\n Ordinary shares rank at the absolute bottom of the order of priority. This is the order in which all the stakeholders of a company are paid if the company cannot pay its debts (or it has entered into solvent liquidation). In practice, when a company is insolvent and placed into administration or liquidation, ordinary shareholders are rarely entitled to any of their investment (outside of any ex-gratia payment).<\/p>\n\n\n\n Preference shares refer to any share that ranks above ordinary shares in terms of dividend payments and\/or return of capital. This right to the first payment or return through dividends is usually cumulative or fixed, though it can be both. <\/p>\n\n\n\n Cumulative refers to the right of a preference shareholder to receive payments each dividend period, including any dividend payments missed because the directors did not declare a profit. <\/p>\n\n\n\n For example, say that, as a general policy, your company\u2019s directors tend to declare dividends quarterly. However, they did not declare a dividend for a full year. This was either because there was not enough profit or the directors thought it was in the company\u2019s interest not to declare dividends, perhaps to reinvest the profits.<\/p>\n<\/div>\n\n\n\n At any rate, in the fifth quarter, they declare a substantial profit, and you are the only holder of the preference shares with cumulative rights to dividend payments. In this case, you have entitlements to receive payments for all five quarters. This entitlement comes before any ordinary shareholders receive their dividends. <\/p>\n\n\n\n A preference share with fixed rights will usually be expressed as a percentage relative to the value of the share. For instance, it might be 7% of \u00a31 per share. Therefore, if you hold 100,000 shares, provided there is sufficient profit, you will be paid \u00a37,000 in dividends if the directors issue a dividend payment. <\/p>\n\n\n\n Fixed preference shares behave much like a loan in that investors will receive a fixed income payment (but only out of profits). This can have various impacts on your company\u2019s assets and liabilities, which is beyond the scope of this article. <\/p>\n\n\n\n Often, preference shares have a right to a return of capital ahead of the ordinary shareholders, which may or may not include any amounts previously paid as dividends. <\/p>\n\n\n\n Typically, this is a non-participating right, which means that once the preference shareholders have received their fixed return, they do not share any further in the rest of the proceeds. Often, their fixed return is a 1x liquidation preference, which means that if the shareholder paid \u00a310 per share, then they would receive \u00a310 per share back before the proceeds were shared with any other shareholder holding a different class of shares.<\/p>\n\n\n\n These generally refer to where preference shares will \u201cconvert\u201d to ordinary shares (or cash):<\/p>\n\n\n\n The purpose of this conversion rights with non-participating preference shares is that it enables the shareholder to receive the greater of (1) their liquidation preference (e.g. \u00a310 per share using the example set out above) and (2) the amount they would receive if they converted their preference shares to ordinary shares and shared in the proceeds based on their shareholding percentage. If the company\u2019s share value has increased since the shareholder invested, then you would expect their share of proceeds to be higher than just receiving back what they initially paid.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n\n
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Classes of Shares<\/h2>\n\n\n\n
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Ordinary Shares <\/h3>\n\n\n\n
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Preference Shares <\/h3>\n\n\n\n
Cumulative Preference Shares<\/h4>\n\n\n\n
Fixed Preference Shares <\/h4>\n\n\n\n
Participating or Non-Participating Preference Shares <\/h4>\n\n\n\n
Convertible Preference Shares <\/h4>\n\n\n\n
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