Ever wonder what the different share classes are?
Shares represent the interest of a shareholder in a company and involve a bundle of rights and obligations between the shareholder and the company. Shares are an important source of financing for companies as shareholders are obligated to pay the amount payable for the share into the company’s capital. In return, the shares confer to the shareholder various rights, such as to the payment of dividends. Certain investors view shares as a way of letting their money ‘grow’, while other investors may value the ability to be involved in the decisions surrounding the company through voting in resolutions.
Singapore’s company law is flexible and allows the creation of different types of shares, subject to certain requirements. s 64 of the Companies Act (CA) provides that different classes of shares may only be issued when provided for within the Company’s Constitution, and the Company’s Constitution sets out the rights attached to each class of shares. Typical rights associated with shares are the ability to vote on resolutions during general meetings, to payment of dividends and/or surplus capital on a winding up. However, these can vary greatly between classes. In this article, we explain what are the main classes of shares that companies, be it a private company or a public company, can adopt. Shareholders should be aware of the different rights that are attached to their specific classes of shares.
Commercial classes of shares: a combination of rights
| General classes of shares | Characteristics |
| Preference Shares | A share which grants priority to the holder over certain matters (usually over payment of dividends and capital on winding up)
Typically, does not include general rights to vote Right to one vote per share on winding up/ changes to rights accorded to class is preserved by the Companies Act |
| Ordinary Shares | The most common type of share
Ranks behind preference shares in priority Typically, grants the holder one vote per share Right to one vote per share on winding up/ changes to rights accorded to class is preserved by the Companies Act |
| Treasury Shares | Shares that have been re-purchased and held by the company
Only Ordinary shares can be held in this way All rights under the share are suspended: company does not receive any rights to vote/ dividends or to asset payments Company can dispose or cancel treasury shares without shareholder approval Company can re-consolidate treasury shares into smaller/ greater units as long as total value remains the same |
Preference and Ordinary Shares
Shares can be broadly classified into Preference and Ordinary shares. These classes were previously defined in the CA, but these statutory definitions were mostly deleted by amendments made in 2014. Still, the act continues to refer to these classes of shares, and the commercial understanding of these classes of shares is important in determining the legal requirements.
Preference Shares
Preference shares, as commercially understood, are shares which gives the holder a priority in areas such as the payment of dividends or capital in the winding up of a company. However, the type of preference is not restricted and may potentially extend to many other types of rights.
Types of Preference rights required to be stated in the Constitution
S 75(1) CA requires rights of the holders of preference shares in following areas to be stated in the Company’s Constitution:
- Any rights to the repayment of capital;
- Any right to participation in surplus assets and profits;
- Whether dividends are cumulative or non-cumulative;
- Any voting rights;
- Any priorities to the payment of capital; and
- Any priorities to the payment of dividends.
Under s 75(2) CA, failure to comply with the above provision, the company and every officer is guilty of an offence and shall be liable on conviction to a fine not exceeding $2,000.
Thus, the provisions in the Company’s Constitution will determine the nature of any priorities granted in the areas listed, where s 75(1) CA must be complied with in the allotment of preference shares or the conversion of any issued shares into preference shares.
Features that may not be reflected in the Company’s Constitution
However, certain features of Preference shares may not be reflected in the Company’s Constitution as s 75(1) does not require all possible rights to be stated in the Constitution. For example, redeemable shares are issued with a condition that the company will or can buy back the share at some future date. Although s 70 CA permits redeemable Preference shares, s 75(1) does not require this feature of the share to be stated in the Constitution. These types of rights may be stated in the share issue instead.
It is important for companies to ensure that the features mentioned in s 75(1) are stated in the Constitution in order to avoid criminal liability, and for investors to thoroughly check both the Constitution and the share issue to be aware of all the rights applicable to the share.
Voting rights of preference shares
General rights to vote
The voting rights attached to Preference shares would depend on the terms of the Preference shares. Thus, it is entirely possible for a company to issue Preference shares with no voting rights or increased voting rights, or only increased voting rights with respect to certain matters. It is also possible for the company to specify in its constitution that voting rights can only be exercised if a share is fully paid for.
s 75 CA requires any voting rights attached to Preference shares to be stated in the Company’s Constitution, and investors should refer to it to determine the full scope of their rights. Voting rights may also be negated, altered, or added to by the Company’s Constitution under s 64(3). Thus, voting rights of Preference shares may change over time.
However, in certain special circumstances, a preference shareholder’s right to vote is ensured by the Companies’ Act even if the share does not confer any right to vote.
Special situations: Winding up/ varying rights
Even where a Preference share does not entitle the holder to a vote at the general meeting (as provided in s 64(5) CA), s 64(4) CA preserves the right of shareholders to one vote at a meeting of the company for resolutions:
- To wind up the company voluntarily under section 290 CA; and
- To vary any right attached to a specified share and conferred on the holder.
This is a unique protection of voting rights, only applicable in these specific situations. However, it is a critical protection to the interests of owners of Preference shares, which gives them the right to influence the result of resolutions which seek to wind up the company or which seek to change the rights they are entitled to as preference shareholders. As these rights to vote cannot be negated or altered by the Company’s Constitution, this protection granted to shareholders is very strong.
Special situation: preference shares issued before amendments
With regards to Preference shares issued before the Companies (Amendment) Act 2014 came into force, s 180(4) CA preserves the old position with regards to voting rights.
This requires a share to fall under the old statutory definition. A “preference share” under the old definition is a share which does not entitle the holder the right to vote at a general meeting or “to any right to participate beyond a specified amount in any distribution whether by way of dividend, or to redemption, in a winding up, or otherwise”.
Where a share is both issued before the 2014 amendments came into force, and falls under the old definition of a “preference share”, s 180(4) CA grants the holder an additional right to at least one vote per share in the situation where “preferential dividends are in arrears for at least 12 months or such shorter period as the articles provide”.
Ordinary Shares
Ordinary or equity shares are the most common type of shares. Ordinary shareholders are generally entitled to profits through dividend payments, surplus assets on winding up and one vote per share. These however, may be varied by contract, and the specific terms of the shareholding will define the actual extent of rights available to ordinary shareholders.
Ranking low in priority
Ordinary shareholders are of a lower priority compared to Preference Shareholders. For example, when dividends are declared, the dividends payable to Preference Shareholders must be satisfied before dividends are paid to ordinary shareholders. Similarly, when the company is wound up, Preference shareholders and creditors will receive the assets they are entitled to first. In this way, Ordinary shareholders are the “residual claimants of the company” and are last in line to receive a company’s surplus assets on winding up.
Voting rights
The requirements under s 64 CA, and s 180 CA for voting rights apply to ordinary shares. In brief, the ordinary shareholder will generally be entitled to one vote per share on any resolution, although this would be subject to any provisions in the Company’s Constitution providing that voting rights may only be exercised when shares are fully paid for, and negations, alterations, or additions made by changes to the Company’s Constitution.
Treasury Shares
Ordinary shares which have been repurchased by the company and are held by the company in treasury are known as Treasury shares (s 76H CA). Preference shares cannot be held by the company in this manner, and when repurchased are deemed to be cancelled immediately on purchase or acquisition.
Treasury shares reduce the need for companies to issue new shares when conducting capital restructuring, where companies have the option to use repurchased shares to seek new financing.
Company as owner of shares:
Disposal and cancellation of Treasury shares
While the company holds Treasury shares, it will be listed as the member holding those shares in the Register of Members under s 76H(2) CA. Under s 76K(1) and (1C) CA, private and public companies may respectively, at any time:
- sell the shares;
- transfer the shares pursuant to a company share scheme for employees, directors or other persons;
- transfer the shares as consideration for the acquisition of shares in or assets of another company or assets of a person;
- cancel the shares; or
- sell, transfer or otherwise use the treasury shares for such other purposes as the Minister may by order prescribe.
The company will not require shareholders’ approval to deal with treasury shares for the above. However, it will still have to lodge a notice with the Registrar together with the prescribed fee if it is a private company, pursuant to s 76K(1A), and do the same but within 30 days if it is a public company, pursuant to s 76K(1D).
Suspension of Rights
Companies cannot exercise the rights that are attached to Treasury shares, under s 76J CA. Rights such as voting rights, to dividends or to the distribution of other assets are suspended while the shares are being held by the company.
Still, the allotment of fully paid bonus shares in respect of treasury shares are allowed, and so is the subdivision or consolidation of treasury shares into greater or smaller amounts so long as the total value remains the same.
Restrictions to holdings
S 76I CA restricts the maximum treasury shareholdings to 10% of the total number of shares or shares of the particular class (ordinary shares) at the time. Excess shares exceeding the limit must be disposed or cancelled before 6 months, beginning on the day on which the limit was passed, or as such further period as the Registrar may allow.
Share structures featuring Preference and Ordinary Shares
Companies have a freedom in how they structure their shares, and certain typical structures have emerged over time. These structures are not legally defined, and the rights and shares involved may vary.
Preference and Ordinary Shares Share structure:
A structure which combines Preference and Ordinary shares, where Preference shareholders enjoy priorities over dividends and/or assets. Commercially, this structure often involves Ordinary shareholders enjoying general voting rights to vote and Preference shareholders not having voting rights save in the relevant special situations.
Alphabet Share-structure:
This commonly involves different classes of ordinary shares, where although the priorities between the shares are the same, different rights are given to each class. The classes are often differentiated with alphabetical letters such as “class A, class B, and class C”, hence the name of this structure.
New Developments: Dual-class share structure
“Dual-class” shares refer to a share structure where certain shareholders have votes disproportionate to their shareholding. This creates different classes of shares according to the number voting rights conferred, and accordingly the influence shareholders can have on resolutions made. Typically, there will be one class of shareholders holding one vote per share (OV shares), and another holding multiple votes per share (MV shares).
This concentrates power in one class, and is a structure said to allow owner managers of companies to retain influence over the matters of the company while allowing investors to have an economic stake in the company. MV votes are thus sometimes called “management shares”. This structure thus confers special voting rights on a class of shareholders. Under s 64A(1) CA, the issue of such shares by a public company must be provided for within the Company’s Constitution and it must set out the different number of votes each class of shares will have.
Public companies with dual-class structures who wish to be listed can now do so as this has recently been approved by the Singapore Exchange (SGX), and it remains to be seen how successful it will be in Singapore. Public companies planning to adopt a dual-class structure should take careful note of the statutory requirements in the CA, as well as the listing rules of the SGX. In particular, SGX has released rules for the listing of dual-class shares, which include the capping MV shares at ten votes each, and certain situations where all shares may only have one vote each. Investors should take care to consider the number and nature of votes and other rights that they will be conferred with.
Conclusion
Each share class has unique strengths and weaknesses as investments, and appeal to different types of investors. Investors who are more profit-oriented may find Preference shares with priorities over dividends and surplus assets attractive, while others may value having the voting rights conferred by an Ordinary share more important.
The specific features of each share as provided for by the issuing company must be considered and evaluated. The Company’s Constitution and the share issue are valuable sources of information as to the types of rights available. Shares can also be influenced by the existence of other share classes, as in the case of a preference share having a priority over ordinary shares. A careful consideration of the circumstances and the specifics of a share will help one to make investment decisions tailored to an objective, and hopefully help to reach a better result.
Have a question on different share classes?
If you have any questions on the different share classes or just require legal advice, you can get a Quick Consult with Yeong WanHsi. Alternatively, you can also get a Quick Consult and expect a call back within 1-2 days on the phone to get legal advice and have your questions answered.
This article is written by Yeong WanHsi of Arrowgates LLC and edited by Emily Tan from the Asian Law Students’ Association.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
