There are two main classes of shares: ordinary and preference. There can be a variety of other shares depending upon different rights attached to such shares in the articles of association. A new type of share can be created provided it does not violate the restriction prescribed by the law. However, any new class of shares will fall within one of the two main categories, i.e. ordinary and preference. The salient features of the ordinary and preference shares are as follows:
The ordinary shareholders are the real owners and assume the entire risk. Each ordinary share gives the following rights to a shareholder:
To vote. It entitles the owner to one vote in the election of the Board of Directors or in any other action where a decision is made with the approval of the majority of shareholders. In case the shareholders cannot attend any such meeting he can exercise the voting right through proxy. This means that the shareholder can delegate his voting right to someone else by signing a legal proxy document.
To share in company’s profit. The ordinary shareholder has the right to share in the company’s profit through the receipt of dividends. However, the rate of dividend is not fixed. The amount and even the year in which the dividend is paid depend entirely on the decision of the Board of Directors of a company. The ordinary shareholders have the residual claim on the profit. The first claim on the company’s profit is of lenders, i.e. the interest, then the tax authorities, then preference shareholders and at the end is the claim of ordinary shareholders. The shares which are entitled to the entire profit remaining after the preference dividends have been paid are often called equity shares or equities.
To maintain the same percentage of ownership when additional shares of ordinary shares are issued. It is also called pre-emptive right. It means that the existing shareholders have a right to purchase in proportion to their present holding from any new issue. This is, however, not a universal rule. If this right is not mentioned in the articles of association then it is not applicable.
To share in assets upon liquidation. In case of liquidation the ordinary shareholders have a residual claim. The liabilities are first to be satisfied from the proceeds of the assets and then the claims of preference shareholders. The ordinary shareholders will get shares from the residual amount in proportion of their shareholdings.
These shares carry a fixed return and have a prior claim than the ordinary shares on profit. They also have their prior claim on assets, after the lender, in case of liquidation. The preference shareholders do not have a voting right. There are different types of preference shares
Cumulative Preference Shares. The dividend accumulates if not paid in a certain year. In the subsequent year the dividend for last year will also be paid. The unpaid dividend is called dividend in arrears.
Non-Cumulative Preference Shares. It means that preference shareholders will have a prior claim on dividends in the year they are announced. If dividends are, not announced in a particular year, the shareholders lose it for that year.
Participative Preference Shares. In this case, if some profit remains after the dividend to preference shares and an equivalent dividend to ordinary shares is paid, the preference shareholders share it on a proportionate basis. It means that. they also share in the residual earnings.
Non-Participative Preference Shares. The shareholders get only the fixed return and the entire remaining profit is available to ordinary shareholders.
Redeemable Preference Shares. Such shares can be redeemed after a certain period, which is specifically mentioned at the time of issue of shares.
Convertible Preference Shares. These shares provide an option to the shareholder to convert their shares into ordinary shares after a certain period, which is specifically mentioned at the time of issue. The preference share can combine two or more of the above characteristics, e.g. cumulative non-participative or cumulative redeemable shares.