What are Different Classes of Shares?
A share class or the share classes is typically made from different shares in a company. The type of shares and classes a company can create is decided by the articles of association and it is also referred to as the articles of incorporation. The classes of shares are created by the company that carries ownership restrictions and to different rights and privileges to various stakeholders. The rights with regard to the voting and access to dividends and more.
Now you know that a company can have different share classes, and don’t you think it is time to know more about them. Here, we will look at the different share types that a company can have for better understanding.
The Different Share Classes for a Company
A company can have as many varied classes of shares as they wish, and they would have different conditions applied to each of them. The rights that are attached to each class of share will be set out in the article of a corporation, and here are the typical ones:
An Ordinary Share
Each company does normally have an ordinary share. This is quite the most basic type of share capital, and it is usually with no special rights or restrictions attached to it. An ordinary share forms the basis of right for the other classes of shares.
They are shares that do not usually carry a right to vote at the annual meetings – but they do carry a priority with regard to the right to dividends that are available for distribution before the other classes. They are mostly given to non-investors.
Non- Voting Shares
Non-voting shares carry along an identical right to the ordinary share, except here, the right to vote at general meetings is another plus.
A Redeemable Share
They are shares that are issued with an agreement that the company will buy them back at the option after a certain period and on a particular date. On that note, a company cannot have all its shares as Redeemable shares.
The shares that are liable to be converted to another class are called convertible shares. They are one of the most common types of shares and are quite preferred over ordinary shares.
A deferred share is one that does not have the right to vote, to participate in profits, except for an extreme situation, or to participate while winding up. They usually serve a purpose, and if the capital is being re-organized in such a way that a proportion of the company’s existing share capital is no longer needed or is relevant, then the surplus can be converted to a deferred. At times, they are issues with the objective of being converted into an ordinary share and used for incentive to management.
A company could have several types of shares that carry some or even all of the features spoken about above. But they will have different rights attached to them, and these rights need to be reflected in the article of a corporation.
Are you still wondering why a company needs to have different share classes? Don’t worry – we can talk about it. Here are some of the crucial factors for why a company would need different share classes.
Benefits of Share Classes
The company can manage and control by restricting a certain class of shares. It can also decide to give its controller rights to a selected class of shares and fewer controller rights to another class. This makes an effective management system.
A company can prioritize its shares for dividend distribution and other classes as well.
The limitations and restrictions can be bordered only for particular classes for distribution in assets during liquidation.
The idea of benefits for start-ups is that they can raise capital without having to dilute the control of their promoters and there is no interference in the decision making.
Since there are pros to this, wouldn’t there be cons? Every coin has two sides, so does this concept. Let’s look at them.
Disadvantages of Share Classes
Here are some of the downsides to sharing classes, but these downsides are comparatively lesser in number than the upsides to them.
Due to share classes, the shareholders could feel a little disconnected from the company when a superior class of share is being issued as it could lessen the rights and benefits to them.
If a new set of share classes are introduced, the preferred voting rights, that is, the higher voting rights are issued, then the original shareholders would be worried. In such cases, the initial shareholders are reduced.
The core reasons for why different classes of shares are issued are because the company could possibly wish to issue shares to different groups of people like friends, family, or investors. It is also important because issuing shares to different groups for right and no right etc., is essential. It can be more favorable to one group over the other.
(This article is written by Groww – investment platform for mutual funds and stocks)