Types Of Shares In A Company (Explained)

Types Of Shares In A Company: Shares form part of the capital of a company. Issuing of shares is one of the ways by which companies can raise capital. It is noteworthy that not all companies have shares. Specifically, companies limited by guarantee do not have shares. Its members are rather liable only to the amount which they have undertaken to be bound by, not below N100, 000. Acquisition of shares is a form of investment, hence the expectation of dividends by the shareholders from the profits made.

A share is a chose in action. In that sense, it is a financial asset that bears rights that can be asserted by an action in court as opposed to an action against anything physical. Thus, share certificate which is normally issued upon the acquisition of shares in a company is a mere representation of the existing rights and interest.

Different Types of Shares
Different Types of Shares

Having shares in a company entitles one to certain rights, privileges and responsibilities. One is that the acquisition of shares is a way through which one can become a member of a company. The court in Borland’s Trustee v Steel Brothers Co. Ltd regarded shares as a mere measure of interest by a sum of money which also determines the extent of liability of the shareholder and the covenants as entered into between the company and the shareholder. The liability of members of a company limited by shares is only to the extent of the shares which they have subscribed to. In essence, no shareholder can be compelled to bear liability of the company that is beyond the amount required to be paid by virtue of the worth of his shares, unless such a person willingly agrees. Shareholders are by virtue of their shares entitled to dividends to be paid strictly out of the profits of the company.

How to understand the different types of shares & class of shares
How to understand the different types of shares & class of shares

It is noteworthy also that inasmuch as ownership of shares in a company entitles holders to dividends, they are not entitled to be paid unless and until dividend is declared by the board of directors who must have ascertained that the company has made profit within the meaning of ‘profit’ as intended by the Act.

Shares that can be owned in a company are basically classified into three types: preference shares, ordinary shares and deferred shares. These classes of shares have varying attributes, rights and privileges accruable to its holders. They shall be discussed in seriatim.

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Types Of Shares In A Company

1. Preference shares: Just from its name, a preference share gives priority and preferential rights to its shareholders, generally. It is also known as preferred shares or preferred ordinary. The preference, specifically, is in respect of receiving dividends, return of capital or both. This simply entails that preference shareholders are to receive dividends and return of capital first before the ordinary shareholders.

Types of shares
Types of shares

The dividend payment of a preference share is fixed. Often, preference shareholders are not given rights of more than one vote per share except on the circumstances provided in section 168 of the Company and Allied Matters Act 2020. Preference shareholders do have protection against losses, and they bear lesser risks than the ordinary shares. Preference shares can be of various types, and this depends on the rights attached to them by the articles of association. The general rule is that preference shareholders are not entitled to participate in the surplus profit of the company (that is, after they must have received their fixed dividend) unless such right is expressly attached to the preference shares. See section 169 (d) of the Company and Allied Matters 2020 and the case of Will v United Lanket Plantations co. Ltd.

Preference share can also bear the right of priority in repayment of capital together with the right to participate in the surplus asset of the company after other classes of shares have been repaid their capital. Further; generally, the payment of the fixed dividends of preference shareholders is cumulative. Section 169 of the CAMA 2020 is instructive on this. And in that case, no other class of shares ranking below the preference shares shall be paid till the arrears dividends of the preference shares and paid.

This was illustrated by the case of Webb v Earle where the court held that where the profits made by the company is not enough to discharge the debts (dividends) owed to preference shareholders in full, they can be made in full from the subsequent profits. Notwithstanding the general rule that preference shares are cumulative, preference shares can either be cumulative or non-cumulative as may be deemed by the company. When it is non-cumulative, it simply implies that when the dividends are missed, they cannot be claimed in the subsequent years. Where a preference share is however, payable out of the company’s yearly net profit, the rule is that the preference shares become non-cumulative. See in Staples v Eastman.

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2. Ordinary Shares: Just from the name, they are also referred to as common shares. The ordinary shares are entitled to all other rights which do not accrue to other classes of shares. They rank subsequent to the preference shares and as such, they are entitled to be paid dividends after preference shareholders have received theirs. This is also applicable when the preference shares are entitled to return of capital first. Ordinary shares are the risk bearers of the company.

How many types of shares
How many types of shares

In other words, they bear more risks. They are also referred to as equity or risk capital. They mostly constitute the control and management of the company. As much as they are risk bear risks, they also have the more advantages as long as the company makes profit and dividends are declared. The ordinary shareholders are entitled to the remnant of the company’s distributable profits after the fixed dividends of the preference shareholders have been paid (of which the preference shareholders may also participate only if the right is attached to it). When the company flourishes, the remnant of the distributable profits can even be more than the fixed dividend received by the preference shareholders.

The ordinary shareholders are also entitled to the surplus assets of the company upon winding up, that is, after the company has paid capital. The voting power generally inures in the ordinary shareholders, hence while they are in the actual management of the company.

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3. Deferred Shares: In priority, deferred shares rank subsequent to ordinary shares. Thus, they are entitled to profits only after the ordinary shares have been paid.

Types of shares in company Law
Types of shares in company Law

They are also entitled to the surplus assets of the company during winding up. Deferred shares are also known as founders’ shares. This class of shares is no longer popular today but is still considered a class of share. This class of share is usually given to promoters of the company and vendors.

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Shares represent the degree of interest which one has in a company limited by shares. It also represents the degree of the shareholders’ liability in a company. As seen in this discourse, the various classes of shares have various rights accruable to its holders. Such rights can as well be varied in accordance with the applicable law which is the Companies and Allied Matters Act 2020, as well as the articles of association of the company. It is clear from the discourse also, that notwithstanding the general rules guiding classes of shares, the rights are widely determined by the articles which forms a mutual covenant between the shareholders and the company.

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