Starting a company is incredibly exciting. However, no one will dispute that understanding the different classes of shares, for example, ordinary shares is far from easy. To help you get your head around what ordinary shares are, we have drafted this helpful guide.
What are ordinary shares?
Ordinary shares are the most common type of shares. Owners of ordinary shares have the right to vote at meetings and receive dividends from the company’s profits. Being able to vote at shareholder meetings means you will get a say in how the business is run and its future direction.
When it comes to dividends, a company is under no obligation to pay dividends to ordinary shareholders. If, in a particular year, profits are low or significant reinvestment in the business is required, a decision may be made not to issue dividend payments.
Are common stock and ordinary shares the same?
Yes, common stock is the US version of the term ordinary share.
What is the difference between an ordinary share and a preference share?
Unlike ordinary shareholders, those with preference shares have no voting rights. However, preference shareholders are first in the queue when it comes to receiving dividends.
Preference shares are often considered safer bets when it comes to risk, as dividend payments can be made at an agreed level and at certain times of the year. Furthermore, if the company falls into insolvency, preference shareholders are the first class of shareholders to be paid.
How many ordinary shares does a company have?
It depends on how many you, as an owner, choose to issue. In most cases, a company will issue 100 shares with a nominal value of £1 each, which means that each share represents one per cent of the company's ownership.
You can choose to issue 100 ordinary shares or have different types of shares, such as preferential, redeemable and non-voting shares (to name a few). For example, you may issue 80 ordinary shares and 20 preferential shares.
Remember, before issuing new shares, you must check your company’s Articles of Association to see the rules regarding issuing new shares and/or different classes of shares.
How do you calculate ordinary share capital?
Share capital is the total value of the shares issued by a company. In our example above, 100 shares issued at £1 each means the company's share capital is £100.
Share capital is different from the market value of shares; the latter refers to the price of the shares if they were sold on the open market, for example, the stock exchange. The market value of your shares may be far higher than the share capital figure.
Are ordinary shares redeemable?
Ordinary shares are non-redeemable. Redeemable shares are shares that the company issues but may agree to buy back at a future date. They are often issued as preference shares.
Can ordinary shares be converted into preference shares?
At some point, for example, where shares are being transferred from one shareholder to another, where those shareholders have historically held different classes of shares, the transferring shares must be converted. This is known as redesignating shares.
Ordinary shares can be converted into preference shares, provided the preference shares are non-redeemable. To redesignate shares, you must identify the authority which allows you to do so. Your first port of call will be the Articles of Association. They may state the process that must be followed in the instance of redesignation. It may also be the case that the Articles prohibit the redesignation of ordinary shares into non-redeemable preference shares.
The Companies Act 2006 is silent on the conversion of shares; however, section 636 provides that a company must notify the Registrar of Companies if it assigns a name or other designation, or a new name or other designation, to any class or description of its shares.
To redesignate shares, you must pass an ordinary shareholder resolution. This means the proposal must achieve 50 per cent or more of the vote at a convened meeting of shareholders or by circulating a resolution for signature.
If you are redesignating existing shares into a class of shares that have not previously existed (for example, you are creating non-redeemable preference shares as up until this point, your company has only issued ordinary shares), the Articles will need to be amended to incorporate the rights attached to the new share class.
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Ordinary shares are a vital component of a company's capital structure, representing ownership in the business and entitling shareholders to certain rights and privileges.
It’s important for businesses, startups, and entrepreneurs to understand the implications of ordinary shares, as they play a significant role in shaping the ownership and governance of a company.
LawBite, with its extensive experience in assisting startups and small businesses, is well-equipped to provide expert guidance and support in matters related to ordinary shares. Whether it is advising on different classes of shares, helping create a comprehensive Shareholders’ Agreement, or resolving disputes in a quick and cost-effective manner, we offer a valuable resource for those seeking legal advice and assistance.
To further explore your options and obtain personalised advice, book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.