Various categories of shares grant companies the flexibility to configure their ownership arrangement in a manner that can support their expansion. Companies possess the liberty to categorize shares into distinct classes, thereby accommodating numerous categories within their share system. Nonetheless, in broad terms, there exist two primary types of share classes.
Ordinary shares confer voting rights and equal dividend entitlements upon their holders. In the event of the company’s dissolution, each shareholder possesses the right to partake in the distribution of assets. Companies retain the ability to establish diverse classifications of ordinary shares, often referred to as alphabet shares, such as class A or class B shares. This nomenclature is employed to underscore disparities between these share classes.
The disparities typically center around the concentration of voting power. Class A shares generally carry greater voting authority per stock compared to standard class B shares. These votes are exercised during the company’s annual general meeting, where shareholders elect board members and contribute to critical corporate determinations. Shareholders are also granted the opportunity to voice their concerns.
Additionally, some shares might be classified as deferred ordinary shares. In such instances, shareholders receive dividends only after ordinary shareholders have been paid a predetermined minimum amount. This distinction might also indicate that one or both of the share classes are redeemable. Redeemable shares grant the company the option to repurchase them based on mutually agreed terms with the investor.
The alternate category of shares is preference shares. Generally, preference shareholders lack voting rights, although this situation can change if their dividend payments are in arrears.
Holders of preference shares receive their dividends ahead of ordinary shareholders, often at a fixed rate. Certain preference shares might also be redeemable, allowing the company to repurchase them under pre-established conditions.
In the event of company liquidation, preference shares take precedence in receiving payouts.
By and large, preference shares represent a cautious investment approach, more suitable for those seeking a passive role in the company while aiming for consistent and relatively stable returns.
Conversion Between Share Classes
Shareholders have the option to shift from one share class to another, provided the relevant shares are convertible.
Common conversion scenarios involve transitioning between subclasses of ordinary shares, such as from class A to class B, or among different categories of common stock issued by the company. This process is also known as reclassifying or re-designating stock.
This transition offers numerous advantages. Some may utilize it to manage the company’s financials and decision-making, while others might employ it to modify both voting rights and the distribution of dividends and assets. This mechanism facilitates attracting investors, devising tax strategies, and distributing dividends without compromising control. It also supports estate planning and the issuance of shares to employees and family members.
The process for transitioning shares from one class to another must be explicitly outlined in the company’s Articles of Association. If not, the board is required to pass a special resolution, backed by a 75% majority vote.
If a defined procedure is already in place, the board’s shareholders pass an ordinary resolution to approve the re-designation.
Three critical details must be noted:
Shareholder’s name and the number of shares undergoing class change Previous share class New share class Once the resolution is approved, the company submits a form to the relevant regulatory authority, where the transition is officially validated.
Convertible preferred shares follow a distinct process. At the time of purchase, a predetermined timeframe and date are established, within which the shareholder can convert their stock at a fixed rate.
While companies often establish unique share issuance structures along with rationales for adopting specific frameworks, the process of transitioning shares between different classes generally adheres to the parameters outlined in the Companies Act.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at Singapore Secretary Services
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