27 Aug 2013

Ordinary Shares

An ordinary share forms the basic capital of a limited company. As a unit of ownership, shares convey a number of rights to the holder:

1.       Rights of Transfer – of ownership by sale (or gifting).

2.       Dividends – payments made by a company to its shareholders. When a company earns a profit, the cash can be put to two uses: either re-invested in the company (retained earnings), or paid to shareholders of the company as a dividend. Publicly traded companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from a regular one.

3.       Right To Vote – the right to vote at members’ meetings on the major strategic issues of the company. These must be usually held at least annually (in the form of an AGM – Annual General Meeting) and on any major corporate action (e.g. mergers and acquisitions). In most cases, one share carries one voting right.

4.       Rights of Inspection – under normal circumstances, the shareholder has the right to inspect the shareholder list, minutes of shareholders’ general meetings, copies of the directors’ service contracts and various registers maintained by the company.

5.       Liquidation Rights – ordinary shareholders have the right to share in proceeds in the event of the liquidation of the company. However, ordinary shares have the last claim upon liquidation after trade creditors, debt holders and preferred shareholders have been paid.

6.       Pre-emptive Rights (anti-dilution clause) – under UK company law, on the issue of any new shares, the present shareholders must be offered the new shares to allow them to maintain their proportionate ownership in the company. Note that there are many countries, such as the USA, which do not require existing shareholders to receive pre-emptive rights on any new shares.

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