Whether you are looking to establish a new company with business partners, raise finance by way of offering shares in your company or invest in an existing company, people often talk about having a “share” or “shares” in a company – what does this mean?
What is a share?
A company is an independent legal entity which has members and in most cases members of a company will hold shares in the company. A share is the means by which a shareholder will hold its interest in a company, it will limit the shareholders liability and also specify rights in relation to that company. A share has a nominal value – for example 1p or £1 and a share cannot be issued for less than that nominal value. So if you have 10 £1 shares in a company £10 is the total liability you will have in relation to your shareholding in that company. Quite often shares will be issued for more than their nominal value – for example a £1 share may be issued at a price of £10 and in this case the total value paid for the share will represent your total liability in the company.
A share has rights attached to it and quite often all shares in a company have the same rights – normally such shares are called “ordinary shares”. Different types of shares can be created in the same company to give different rights to the holders of different types of shares. The rights attaching to shares are set out in the articles of the company, or sometimes a shareholders agreement, so it is important to know what these are if you are either investing or looking for investors.
Common rights which shares have are:
- – a right to a dividend – effectively a share in the profits of the company;
- – a right to vote in general meetings of the company; and
- – a right to participate in undistributed profit in the event the company is wound up.
Examples of different rights which can be attached to different classes of shares are:
- – a preferential rights to dividends (often called “preference shares”);
- – no right to vote on any issues (“non-voting shares”); or
- – weighted voting rights (“management shares”).
Thresholds will be set in the company’s articles and in company law in relation to voting on different matters – “ordinary” resolutions require a simple majority to be passed (i.e. more votes in favour than against) and “special” resolutions require a 75% majority so it is important to know what proportion of shares you hold or are being offered in a company and whether that proportion can be changed or “diluted” without your consent.
In summary, the concept of a share creates a very flexible ownership structure in a company and gives the holder of the share certain rights in relation to that company depending on the company’s constitutional documents. Shares can be valuable assets so it is worth knowing what rights they have.
About the Author
Hannah Ives is an English qualified solicitor but also has wide ranging experience of cross border transactions and has worked on legal matters in China, Russia, the UAE and various European jurisdictions. She has hands on experience of preparing businesses for sale from a legal perspective helping to achieve the best value for a business sale. For more legal advice and to contact Hannah, go to www.lawbite.co.uk