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14 December 2018 You are not logged in. Login now.

What Should You Know About Share Rights?

What should you know about share rights?

The ownership structure of a limited company is characterised by the distribution of its share capital. Two shareholders, for example, may hold 50 shares each out of the total 100 issued shares illustrating their equal 50% ownership. Each share class is assigned with rights, otherwise known as prescribed particulars, that outline the powers the respective shareholders have within the company.

It is fairly common for new companies to have one share class with a standardised set of rights that are usually adopted when the company is also using model articles. These prescribed particulars may state that the ordinary share class has ‘Full rights with regards to voting, participation and dividends.’ However, the ownership structure of a company may not always be so clear cut and this can often necessitate the use of more bespoke rights for differing share classes to better reflect a company’s composition.

The rights attached to a share class will be outlined in the articles of association. New rights can be defined when issuing new shares through the use of a board resolution or a shareholders agreement.

Different share classes reflect ownership

What do the rights mean?

VOTING RIGHTS - The voting rights attached to a share class determine how many votes are attached to each share in a show of hands scenario. Voting rights for a given share class may also only apply in certain circumstances.

PARTICIPATION RIGHTS - Participation rights refer to the right to participate in a distribution of capital or assets in a situation in which the company is to be wound up.

DIVIDEND RIGHTS - This refers to the right to dividends attached to each share class. There may be one class of shares within the company where the dividend rights are Pari Passu and each share is entitled to the same dividends. Multiple share classes may also be used so that X amount of dividends can be issued to ‘Class A’ shares and Y amount can be issued to ‘Class B’ shares.

Different particulars attached to different share classes are often used to clearly define differing voting powers, share structures, control of decision making and to better reflect ownership of the company.

Share rights

Why might different rights be used?

Example 1 - Non-Voting Shares

A company may opt to provide remuneration to employees through the use of non-voting shares. This would allow the owners of a company to incentivise employees with a dividend scheme whilst maintaining full control over decision making within the company. It may also be more tax efficient for employees to have a basic salary that is supplemented via the issuing of dividends.

Example 2 - Preferential dividend rights

A class of shares may be assigned preferential dividend rights. This would ensure that the given share class would take precedence when dividends are distributed ahead of any other share classes within the company. This may be used as a means to attract potential investment as investors could receive a return on their initial investment when the company has made profit before dividends are issued elsewhere.

The above is intended as a general guide only and should you wish to deviate from the standard share rights we recommend contacting an accountant for professional advice.