Shareholders, often referred to as members, are the owners of a company. Ownership is evidenced by the number of shares that a person or company holds.
Depending on the number of shares, a shareholder has certain rights which include the right to remove the director(s), the right to change the articles of association of the company and the right to receive dividends.
We strongly recommend that shareholders regulate their relationship with each other by way of a shareholder agreement. This is a contractual document which, unlike the company constitutional documents, is confidential and typically includes the following provisions:
Shares of a company can have many different class rights. Examples of these are:
Redeemable non-voting shares
These are widely used for employees so that some of their remuneration can be paid as dividends, which can be more tax-efficient for the company and the employee. In other ways, the shares may be of limited value. Not only will they be non-voting but the directors are usually empowered to redeem the shares (take them back) at their nominal value (usually £1 per share) at any time. This is a useful power if the employee leaves, or if the company is sold.
Preference shares
These will usually have a preferential right to a fixed amount of dividend, expressed as a percentage of the nominal (par) value of the share, e.g. a £1, 7% preference share will carry a dividend of 7p each year. It is, however, still a dividend and payable only out of profits. The dividend may be cumulative (i.e. if not paid one year then accumulates to the next year) or non-cumulative. The presumption is that it is cumulative. The dividend is usually restricted to a fixed amount, but alternatively the preference share may be participating, in which case it participates in profits beyond the fixed dividend under some formula. Preference share are often non-voting (or non-voting except when their dividend is in arrears). They may be given a priority on return of capital. Often they will not be entitled to share in surplus capital.
Deferred ordinary shares
Shares on which no dividend is paid until other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.
Management shares
A class of shares carrying extra voting rights so as to retain control of the company in particular hands. This may be done by conferring multiple votes to each share (e.g. they carry ten votes each) or by having a smaller nominal value for such shares so that there are more shares (and so more votes) per £1 invested. Such shares are often used to allow the original owners of a company to retain control after additional shares have been issued to outside investors.
Other classes
Any class of shares may be created. Sometimes different classes are set up for particular purposes, such as the following arrangement, used in ‘deadlock’ articles: In a company with two investors, A and B (perhaps a joint venture between two unrelated companies) the company may have two classes of shares, A shares and B shares. The shares may carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles may provide for, say, two directors to be nominated by the holders of the A shares and two by the holders of the B shares, etc.
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