Difference between preference and ordinary shares
2 minute read
The majority of businesses that are incorporated in Singapore are private companies limited by shares. This means each shareholder of the company owns a certain portion or percentage of the company expressed by the number of shares held in the capital of the company.
Classes of shares
Shares consist of rights and obligations which vary between different classes of shareholders. The law in Singapore is quite flexible on creating share classes, there are no restrictions on type of issued shares. The two main classes of shares are Ordinary share(s) and Preference share(s). They differ from one another based on the benefits and rights attached to the share(s). Continue reading to find out more about the differences between these 2 share classes.
Ordinary shares are the main type of share(s) among private limited Companies. In such companies, all shareholders will have the same rights. The holder(s) of ordinary share(s) are generally entitled to:-
(1) Attend General Meetings and vote: Ordinary shareholders can participate in internal corporate governance through attending annual meetings and voting. They are allowed to vote on important matters such as appointing directors. They can have one vote per share subject to the Company’s Constitution;
(2) Share in Company’s profits: Shareholders can receive dividends if the Company has made profits and decided to distribute them;
(3) Have a distribution on winding up: If the Company is wound up, shareholders entitled to any remaining assets of the Company after all its debts are cleared;
(4) Limited liability: Shareholders are protected against the financial obligations of the Company and are only liable for the value of their shares.
Disadvantages of the Ordinary Shares
(1) Priority distribution of dividends: Priority would be given to Preference shareholders when the dividends are distributed;
(2) No guaranteed right to receive dividends: The company can make a decision not to distribute the dividends depending upon the situation.
Preference shares commonly give some sort of benefit or preferential rights to the holder(s) over and above the rights of Ordinary shareholders. Those rights and benefits to the Preference share(s) will vary from Company to Company and should be set out in the Company’s Constitution in accordance with the Singapore Companies Act. Most Preference shares provide their holders with:-
(1) fixed or preferential rights to a dividend;
(2) priority claims on the assets upon liquidation of the Company;
(3) redeemable shares: the Company may “buy back” the Preference shares from the holder at a fixed price; or
(4) convertible shares: the holder can exchange Preference shares for other capital instruments (such as convertible notes) issued by the Company.
Disadvantages of Preference Shares
(1) No voting rights: Preference shareholders do not have the general right to vote at meetings;
(2) Higher dividends: Preference shares carry a higher rate of dividend than the interest of debentures.
Do preference shares affect taxes? Are they also treated like ordinary shares?
Preference shares do not affect taxes. They are treated similarly to ordinary shares.
Which type of shares should my company issue?
Each type of shares has its own unique appeal according to the specific types of investor. Preference shares provide the shareholder with a priority to receive dividends, which may be more appealing to the profit-oriented investor, while others may find that the voting rights conferred by Ordinary shares are more important to them.
When choosing the types of share class for your company, you should evaluate the points highlighted in the main discussion above so that you can assess which class of shares will suit your investors the best.
If you are looking to expand or start your company in Singapore, or want to know more about the different types of shares, contact us to find out more.