As a New Zealand company with various shareholders, you might issue different kinds of shares with different rights attached to them. These are known as 'share classes' and refer to the different types of interests shareholders have in a company. This article will discuss the various shares a company can issue in New Zealand.

Different Share Classes

A company can create different classes of shares. Companies can issue shares which are:

  • redeemable;
  • confer preferential rights to distributions of capital or income;
  • confer special, limited or conditional voting rights; or
  • do not have voting rights attached to them.

Typically, the company's constitution will outline the different classes of shares that the company can issue.

Usually, the share classes impact the main rights of shareholders, including their:

  • right to vote;
  • participation in dividends; and
  • entitlement to remaining capital upon winding up the company.

Entitlement to Vote

Ordinary shares in a company usually carry one vote per share. In shareholder meetings, certain company decisions require a certain minimum of votes to pass.

This may be 50% for ordinary resolutions or 75% for special resolutions.

However, if a shareholder receives non-voting shares, they will not be able to vote in shareholder meetings. While they still may have other rights, such as the right dividends, they will not be able to impact company decision-making. This option may be preferable for silent investors who do not wish to involve themselves with the company's affairs.

Entitlement to Dividends

Dividends are the distribution of profits by a company to its shareholders. The usual rule is that if a company decides to pay its shareholders dividends, every shareholder has an equal right to receive dividends. However, this may not be the case if:

  • a different class of shares has been created, which prioritises dividends for certain shareholders; or
  • a class of shares is created with no dividend rights.

Entitlement to Capital

When a company is wound up, a liquidator usually sells all assets and uses the sale proceeds to pay off the company's debts in order of priority. Once all debts have been repaid, any remaining assets will be distributed to shareholders. A different class of share may have different rights attached to the distribution of capital when winding up the company. Usually, this is a right of priority.

Naming Your Share Classes

While a company can create many different classes of shares, the two most common types of shares are ordinary shares and preference shares.

Ordinary Shares

As the name suggests, ordinary shares are the most common type of shares a company will issue. Ordinary shares come with the following:

  • right to vote;
  • right to receive dividends; and
  • entitlement to receive capital upon winding up the company.

If a company can no longer pay its debts as they fall due and is wound up, ordinary shareholders will rank last. After the liquidation process, secured creditors receive payments first, followed by unsecured creditors, preferential shareholders and then ordinary shareholders.

Preference Shares

Preference shares typically attach the same rights to vote and dividend rights as ordinary shareholders though they will also have a liquidation preference. If a company is wound up, preference shareholders will have priority over ordinary shareholders to get their money back. Typically, preference shares are sought after by investors as they wish to see that the company will reimburse them before other shareholders if the company needs to be wound up.

Key Takeaways

Shareholders in a company may have different rights due to holding different classes of shares. Typically, each share carries a right to vote, the right to participate in dividends, and entitlement to any remaining capital upon winding up of the company. While a company will typically start with only ordinary shares on issue, external investors may seek to be issued preference shares that carry rights in preference to the ordinary shares already on issue.