How Many Types or Classes of Shares Can a Company Have?
A company may have as many different types, or classes, of shares as it wishes, all with different conditions attached to them. The rights attaching to each class of share in the company will be set out in the articles of association of the company. However typically the most common classes of share are:
- Ordinary shares – every company will normally have ordinary shares. This is the most basic type of share capital and usually has no special rights or restrictions attached to it. Ordinary shares form the basis of the rights of the other classes of shares.
- Preference shares – these shares tend not to carry a right to vote at general meetings but carry a priority in regards to the right to annual dividends available for distribution before other classes of share. They are usually issued to investors.
- Non-voting shares – these usually carry identical rights to ordinary shares except the right to vote at general meetings.
- Redeemable shares – these shares are issued by the company with an agreement that it will buy them back at the option of either the company or the shareholder after a certain period, or on a fixed date. A company cannot have only redeemable shares.
- Convertible shares – shares which are liable to be converted into shares of another class. The most common type of convertible shares is preference shares which are convertible into ordinary shares.
- Deferred shares – shares which have no right to vote, to participate in profits or, except in extreme circumstances, to participate on a winding-up. They normally serve a purpose if the share capital is being re-organised in such a way that a proportion of the company’s existing share capital is no longer needed or relevant; then the surplus shares may be converted into deferred shares. They are sometimes issued with the intention of being converted into ordinary shares under certain circumstances and are used as, for example, an incentive to management.
One of the main reasons for issuing shares of different classes are that a company may wish to issue shares to different groups of people such as friends, family members or investors on different terms. It may also be important when issuing shares to different groups for voting rights and rights to dividends etc. to be more favourable for one group than another. Therefore a company may, for example, have A, B & C class shares which carry some or all of the features set out above for a particular share class but have different rights attaching to them. These rights will need to be reflected in a company’s articles of association.