Most companies only have one kind of shares, called ordinary shares. Ordinary shares represent the company’s basic voting rights and reflect the equity ownership of a company. Ordinary shares typically carry one vote per share and each share gives equal right to dividends. These shares also give right to the distribution of the company’s assets in the event of winding-up or sale.
The rights attached to ordinary shares are generally defined in the articles of association of the company and/or in the shareholders agreement.
Deferred shares carry fewer rights than ordinary shares and can include:
• shares in which dividends are only paid after all other classes of shares have been paid
• shares in which dividends are only paid after a certain date or event
• shares that are not tradable until a certain date – such shares are usually issued to employees in order to give them a long term interest in the company and to increase their loyalty
• shares which, in the event of insolvency, do not give their holders any rights until all other shareholders are paid.
Redeemable shares are shares that can be bought back by the company at some point in the future. The redemption date can either be fixed in advance (eg 3 years from the date the share is issued) or decided at the company’s discretion. The redemption price is usually the same as the issue price, but not necessarily.
Shares given to employees are often redeemable, so that the company can get its shares back if the employee leaves. However, the ability to redeem shares is limited and is subject to specific statutory requirements. For instance, the company may only redeem the shares out of accumulated profits or the proceeds of a new issue of shares.
Preference shares give their holder a preferential right to a fixed amount of dividend, meaning that they will receive dividends ahead of ordinary shareholders. Preferred shareholders also have a higher priority claim to the company’s assets in case of insolvency.
Because this class of shares carries many benefits and guarantees, it is mostly issued to investors, for example to venture capitalists, who invest in startups. However, preferred shareholders do not have the same ownership rights in the company as ordinary shareholders; they are often non-voting and sometimes redeemable. Redeemable preference shares are a common way of financing a business. They allow a company to repurchase its shares in the future (eg if interest rates fall and the company wants to issue new shares with a lower dividend rate), while giving investors the possibility to get their money back at a pre-agreed price.
Management shares give their holders extra voting rights at the company’s general meetings (eg two votes for one share). Such shares are often used to enable company directors to retain control of the company in the event of shares being issued to outside investors.
Alphabet shares are a subclass of ordinary shares, which allow a company to vary the rights attached to shareholders.
Although each class of shares can be given a descriptive name (eg non-voting shares, preference shares or redeemable shares), it’s common to just label share classes with alphabet letters (A, B, C, D, etc, depending on the number of subgroups a company wishes to create), each class conferring different voting rights, rights to dividends and rights to capital.
Alphabet shares therefore enable companies to enhance or restrict certain shareholders’ rights. For example, ‘A shares’ can have a greater rate of dividend than ‘B shares’, so that for the same number of shares, owners of A shares receive more than owners of B shares.