Understanding Different Types of Shares


In our blog post on “Shares = Control and Ownership in Company”, we shared that the manner of allocation of shares is critical and will have an impact on your Company in terms of decision-making, financial position and company management. To ensure that the manner of share issuance is fair, reasonable and equitable, you will need to be aware of the different classes of shares and the main attributes of each class of shares.

A company incorporated in Singapore can opt to create different types of shares, depending on its needs and objectives. As the law in Singapore is flexible when it comes to the creation of different classes of shares, there are no regulatory restrictions on issuing shares with different rights. Hence, the rights associated with the different classes of shares would need to be defined in the company’s constitution, or in the shareholder resolution that creates a particular class of shares.

Let’s take a look at the different types of shares that are typically issued by companies in Singapore, and how you can use them.

Ordinary Shares

These are the most common type of shares issued which have no special rights over other shareholders. Ordinary shareholders are ranked after preference shareholders with respect to dividend distribution. When the company is liquidated, the residual assets are distributed equally amongst themselves after all debts have been paid.

Use this when you want to distribute risks and profits equally among the shareholders of your Company.

Deferred ordinary shares

These are shares on which no dividend is paid until after the prescribed minimum dividends have been distributed to other classes of shares. Deferred shareholders stand last in line for dividends. These shares also do not have priorities for a company’s assets undergoing bankruptcy until other shareholders have claimed the minimum interest.

Use this when you want your Company to achieve a certain level of profitability or when you wish to obtain an investment commitment towards your Company for a certain minimum period.

Preference Shares

These shares have preferential rights over ordinary shares, usually in respect of dividend entitlements or return of capital on winding up. Such shares may only be allotted if their rights are set out in the company’s constitution with respect to the following areas:  

  • rights to the repayment of capital;
  • rights to participation in surplus assets and profits;
  • dividends are cumulative or non-cumulative;
  • voting rights;
  • priority of payment of capital; and
  • priority of payment of dividends.

Use this you wish to accommodate to the needs of various stakeholders e.g. founders, investors, independent directors and employees or to cater to the various requirements of different groups of investors.

Non-voting Shares

These shares carry no rights to vote or attend general meetings. Preference shares are often non-voting, but they guarantee dividends.

Use this when you wish to incentivise your employees and pay part of their remuneration in the form of dividends and achieve tax efficiency for your Company and employees. Or when you wish to raise share capital and retain management or control of your Company by seeking investors who are keen to invest but not keen to participate in decision-making.

Redeemable Preference Shares

These are shares issued on the terms that the company will redeem them in future at a pre-determined price either:

  • on a fixed date;
  • at directors’ discretion;
  • at the company’s option; or
  • at the shareholder’s option,

provided the company has sufficient distributable profits or assets to make the redemption.

Use this when you wish to provide an investor with an agreed exit strategy or as a means of returning cash to shareholders.

Cumulative Preference Shares

These shares are entitled to receive cumulative dividends when the company pays a reduced or zero dividend in certain year(s). Hence, when the company resumes dividend distribution, the amount of dividend in arrears must be paid to the cumulative preference shareholders first before dividend is distributed to the other classes of shareholders.

Use this when you wish to use this feature of accumulating dividends to attract investors in raising capital and distribute dividends only when your Company is able to generate profits.

Management Shares

These shares carry extra voting rights at the company’s shareholder meetings and usually issued to the Management of the company.

Use this to retain control of your Company after additional shares have been issued to third party investors.

Employee Share Options

Technically speaking, these are not shares. These allow employees to exercise their right to buy the company’s shares at a specific pre-determined price within a certain period of time. When employees exercise their share options, the company will issue new shares to its employees accordingly, which will have the same rights as other ordinary shareholders.

Use this to reward and retain your employees by providing them with ownership interest in your Company as well as to motivate them to align them with your Company’s strategic objectives.

Conclusion

As you can see, different types of shares serve different purposes, and they can have different rights with respect to voting and dividend entitlements. Even if your Company issues only one type of shares, you can create different classes of shares with different rights accorded. For example, for ordinary shares, you can have “Class A Ordinary Shares”, “Class B Ordinary Shares” etc. Likewise, this can also be done for preference shares.

Do note that there is no specific guidelines on how you should name the different classes of shares. Hence, “Class A” shares in one company may not mean the same thing as “Class A” shares in another company. You will only be able to obtain exact details e.g. rights to voting and dividend entitlements of various classes of shares in that company’s constitution or board/shareholder resolutions.

Now that we understand the different types of shares are typically issued in Singapore and how they are used, we will dwell further in our next blog post the different types of share structures that are typically used by companies incorporated in Singapore.

 


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