Voting rights assigned to a share class determine how many votes are attached to each share. Voting rights for a given share class may also only apply in certain circumstances.
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.
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. This means 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.
Why different rights are 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. Issuing dividends in addition to a basic salary is more tax-effective ins certain situations.
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 class. This may be used as a means to attract potential investment. This would allow investors to receive a return on their initial investment when the company has made a profit before dividends are issued elsewhere.
The above is intended as a general guide only. we recommend contacting an accountant for professional advice when issuing multiple share classes with different rights attached.