Types of Shares Quiz

Shares

• A share represents a shareholder's interest in a company, measured in monetary terms, and includes mutual covenants among shareholders.
• Shares are a form of intangible property.
• Types of shares include:
  • Ordinary shares: Most common type, dividend payments are not fixed and depend on company profits, and holders have voting rights.
  • Non-voting ordinary shares: Issued to raise capital while maintaining control. Holders do not vote.
  • Deferred shares: Allotted to founders, usually entitled to a share of profits after ordinary dividends reach a specified amount. Less common today.
  • Redeemable shares: Can be redeemed by the company or the shareholder after a specified period, event, or at option. Must be fully paid-up. Must be issued alongside other types of shares.
  • Preference shares: Prioritized over other shares in dividend payments and capital repayment during liquidation and has a fixed dividend rate. Voting rights are often restricted. Different classes may exist.
    • Cumulative preference shares: Accumulate unpaid dividends.
    • Non-cumulative preference shares: Unpaid dividends are not carried over.
    • Non-participating preference shares: Do not participate in surplus profits after stated dividends are paid to ordinary shares.
    • Participating preference shares: Participate in surplus profits up to a fixed percentage after ordinary dividends are paid.

Types of Preference Shares (Continued)

• Cumulative preference shares: Unpaid dividends accumulate and must be paid before any dividends are paid to ordinary shareholders.
• Non-cumulative preference shares: Unpaid dividends are not carried over. Dividends are paid only when profits are available.
• Non-participating preference shares: Do not share in surplus profits after the fixed dividend rate is met.
• Participating preference shares: Share in any surplus profits after the fixed dividend rate is paid to ordinary shareholders. These proportions are often specified in the company's articles.

Legal Effect of Issuing Shares

• Companies previously had to show a nominal value (par value) for their shares in the memorandum of association, though this is no longer required.
• Companies may now issue shares at a discount or premium.
• Allotment of shares is the process of assigning shares to an interested party.

Transfer of Shares

• Shares are transferable property.
• Requirements for share transfer: A proper instrument is delivered to the company, and the directors do not exercise their power of refusal.
  • Private companies and companies not listed on the stock exchange often have a share transfer procedure that includes: the transferor completing and signing a transfer instrument, the transferor attaching their share certificate, and the transferee signing the instrument and sending it to the company for registration.
• Public listed companies: transfer is handled through stockbrokers and trading on a stock exchange.

Pre-emption Rights and Directors' Rights of Refusal

• Private companies often include pre-emptive clauses in their articles, giving existing shareholders the first right to buy shares if offered to other parties.
• Directors have the power to refuse the transfer of shares to outsiders, but the conditions of this power are usually outlined in the company’s articles.

Maintenance of Share Capital

• Maintain its paid-up share capital. Shareholders' liability is fixed.
• Cannot return capital to shareholders.
• Maintain capital for creditors.
• Examples of actions required to maintain and respect share capital are:
  • Dividends paid from distributable profits.
  • Proper procedures for distributing capital to shareholders.
  • Restrictions on buying back company shares and/or giving financial assistance.
  • A company with net assets below half its share capital, must hold a meeting.

Dividends

• A shareholder's portion of the company's profit according to company law, legally distributable. This is usually paid out of the company's profits.
• Dividends are paid according to company articles.
• The board of directors suggests the dividend amount to the company for official declaration.
• Only distributable profits should be used in the payment of dividends.

Reduction of Share Capital

• A company, after approval by the court, may reduce its share capital under certain conditions defined in the Companies Act.

Increase of Capital

• The company must act through a resolution from a general meeting in order to increase its share capital.

Consolidation of Shares

• The company can consolidate previously issued shares into fewer, larger shares.
• Company resolutions and an announcement to the registrar within a specified time-frame are required.

Conversion of Shares

• Shares can be converted to stock.
• Specific company actions and notifying the registrar are required.

Subdivision of Shares

• A company can create smaller shares from existing ones.
• Company resolutions and an announcement to the registrar are required.

Cancellation of Unissued Shares

• Shares that have not been issued can be canceled, reducing the share capital.
• Company resolutions and notifying the registrar are required.

Loan Capital and Debentures

• Borrowing money, often from financial institutions, and represented by debentures or loan capital.
• Debentures are typically long-term loans and may be secured by the company's assets, and have different types such as single, series, convertible and secured debentures.
• A trust deed is common to guide the terms of the debenture including payment and conditions.

Charges

• Charges can include fixed or floating charges.
• A fixed charge relates to a permanent asset whereas a floating charge is linked to assets like current assets that change frequently as the business conducts its normal affairs.
• The process of crystallization transforms a floating charge to fixed status.
• Registration of charges is necessary and usually within stipulated timelines.

Remedies for Unsecured and Secured Creditors

• Unsecured creditors have rights to sue and petition the court for winding up.
• Secured creditors have rights stemming from debentures like appointing receivers.

Secured Transaction Elements

• The elements of secured transactions consist of: the security interest, a security contract defining the secured property, and secured obligation.
• A security interest is a property right with three requirements to establish it: (1) secured creditor giving value, (2) debtor having interest in secured property and (3) security contract outlining the described property.
• Perfection of a security interest provides legal enforcement power against third parties; this often involves registration; methods for doing so include registration of a notice, possession and control. Priority among competing security interests is determined by registration and other relevant factors as laid out in the relevant legislation.

Prospectus

• A prospectus is a formal document that firms use to invite individuals to invest in securities.
• It outlines information about the company, the investment opportunity, and how the proceeds from the investment will be used.

Test your knowledge on various types of shares including ordinary, preference, and redeemable shares. This quiz covers key features and differences among them, helping you understand their significance in the financial market.