CFM3256 - Understanding loan relationships: issuing shares

Different kinds of shares

Ordinary shares

There are different kinds of ordinary shares.

Ordinary shares normally carry a right to participate in a company through voting and an entitlement to receive dividends. When a company is wound up the ordinary shareholders will be last in the queue to have the par value of their shares returned to them. It is also possible to issue ordinary shares which carry different rights. Often these shares are differentiated by being classed as ‘A’ shares, ‘B’ shares etc. It is possible to issue ordinary shares which carry no voting rights but do carry rights to dividends. This type of share might be found where the original shareholders want to keep control of the company’s affairs but do not want to own more than half the shares.

Preference shares

Preference shares are not included in equity share capital because their rights are different to the ordinary shareholders’ rights. Preference shares do not normally give the holder the right to vote and so issuing preference shares will not take the control of the company away from the ordinary shareholders. They carry a right to a fixed dividend so the preference shareholder would not benefit if the company’s profits increase. On the other hand preference share holders are entitled to their dividend before the ordinary share holders get theirs so the preference share holders’ dividend is more likely to be paid if the company is not doing so well. In addition, if the company is wound up, it is common for the preference share holders to get repaid the par value of their shares before the ordinary shareholders get their money back.

Redeemable preference shares

The terms of issue of redeemable preference shares give the issuer the right to redeem them. This type of share comes near to having the qualities of a debt.

Cumulative preference shares

Cumulative preference shares allow the holder to be paid a dividend in a later year if there are insufficient funds to meet the dividend in an earlier year. This means the holder can probably ensure that dividends for all years are paid regardless of the ups and downs of the business.