While you focus most of your efforts on developing a new product or service for your firm, you should also pay particular attention to your company’s shareholders structure and how you split ownership among its founders, investors, and workers.
This is to avoid losing control of your business, which is especially important when diluting ownership or going public. To assist you in determining your company’s shareholding structure, we present an overview of shares, ownership rights, and share classes in this article.
A share is a unit of ownership interest in a corporation, to put it simply. It is frequently given to a shareholder in exchange for their investment or effort, and it ensures that earnings are distributed equally through dividends. Shareholders have the option of keeping their shares, selling or transferring them.
As a result, you may grant your shareholder certain rights in your firm in exchange for their investment, which vary based on the kind and class of share. While most businesses only have one type of stock: ordinary stock, you may develop several types of stock to distinguish between founders, investors, and workers. Shareholder rights may change depending on the kind of stock.
Rights of Shareholders
Because shares are a collection of rights and duties, different shareholders may have different rights. Ordinary shares are the most common kind of stock issued by most businesses. However, Singapore company law is flexible, allowing several types of shares to be created, giving different owners differing rights to the business (often referred to as “classes of shares”). The following are the most important rights related to shares:
Right to Attend And Take Part In Voting At General Meetings
One of the fundamental rights of a shareholder is the ability to vote, and ordinary shares typically have one vote apiece at general meetings. In addition, non-voting shares, extra voting rights (e.g., ten votes per share), and limited voting rights may be available (e.g. only vote in particular circumstances).
Right to Profits Sharing Among Shareholders From the Firm
The firm’s earnings are transferred to shareholders in the form of a dividend, which is a fixed sum paid on each share. Dividends are given whenever the firm makes profits and to the extent, it chooses to distribute them. Unless otherwise stated, dividends are paid in proportion to the number of shares owned by each shareholder. It’s becoming more typical for a company’s Articles of Association to state that the company’s shares are divided into several classes, with the directors (or shareholders) having the ability to change the dividends distributed to each class.
Right to Final Distribution Among Shareholders Upon Winding Up Or Liquidation
After all of the company’s debts and expenses have been paid, the shareholders are entitled to any leftover assets upon winding up or striking off the company. In most cases, residual assets are distributed among members per their stakes in the company’s stock. However, if the shares are separated into several classes, the company’s Articles may arrange for the distribution of residual assets to be prioritised for some shares.
Types of Shares
Although public limited companies are more likely to have several share classes, it is not unusual for private limited firms to have many share classes as they grow and expand to meet the demands of diverse stakeholders. A private limited business, for example, could choose to change the dividends paid to various shareholders, create non-voting shares for family members, or issue redeemable preference shares for staff.
There are no unique limits on issuing shares with varying rights in Singapore since the legislation is broad when it comes to the formation of share classes. “Preference shares” with no voting rights, “management shares” with additional voting rights, and “alphabet shares” such as A-shares and B-shares are all examples of share classes. However, because these share classes lack a legal definition, their accompanying rights would have to be stated in the Constitution or the Resolution that establishes the class of shares.
For various reasons, a firm may issue numerous types of shares. Among the most common explanations are:
- Keeping the company’s power in the hands of a few people.
- To promote investment, companies are offering shares with preferred dividend rights.
- If the firm closes, various people will have distinct rights to corporate funds.
- Taking into account the diverse demands and preferences of various investors.
The following are some examples of common share classes and their associated rights:
The Ordinary Shares
The majority of businesses only have ordinary shares. These shares provide the bearer:
- one vote per share,
- equal dividend participation,
- a share of the firm’s surplus capital if the business is wound up.
The Shares Without Voting Rights
These shares do not entitle you to vote or attend general meetings. Non-voting preference shares are common. Non-voting shares are frequently offered to:
- the company’s workers (such that a portion of their salary is paid as dividends as an incentive to the employees)
- the principal owners’ family members.
The Redeemable Shares
These shares are issued with the understanding that the corporation will (or may) purchase them back at a later period. The holders of these shares have the option of having their capital repaid at a set date or the company’s discretion.
The Preference Shares
These shares get priority over regular shares when it comes to dividends, for example, a fixed amount of dividend or participating in profits beyond the fixed dividend under a fixed formula. These shares may also be granted first preference in the event of liquidation (but not entitled to share in surplus capital). Preference shares are frequently non-voting and redeemable.
The Ordinary Deferred Shares
Shareholders of the ordinary deferred shares do not earn a dividend until all other classes have received at least a minimum payout.
These shares have additional voting rights, allowing certain shareholders to keep control of the corporation. These shares are frequently utilised to allow the company’s founders to retain control after new shares have been offered to outside investors.
The “Alphabet Shares”
Some companies may wish to create different classes of ordinary shares (commonly referred to as “Class A,” “Class B,” “Class C,” and so on) to create minor differences between shareholders (for example, to allow directors to pay different dividends on different shares) or to divide certain rights between shareholders.
Whereas many small businesses provide their shareholders with an equal number of rights per share, there is a lot of room for founders and investors to be given different levels of managerial control and different levels of entitlement to the company’s earnings or cash.
Investment-seeking enterprises, as well as startups that are not seeking outside funding at the time of incorporation, may find it beneficial to build an equity framework that allows for future investment and shows the founders’ competence.
By providing this flexibility, Singapore law continues to inspire a welcoming jurisdiction for the establishment and growth of businesses, capturing the desires of various types of investors who may or may not require greater control over the company’s management or who may or may not require the assurance of a fixed return on their investment in the company.
Anyone considering the development of several share classes should think about why they’re being created and carefully assess the permissions granted to each class.