In this article we wish to provide some analysis on the two classes of shares most commonly used by private companies limited by shares in Cyprus, namely, ordinary and preference and the most common rights attached thereto; this is merely an indicative list for your better understanding on how classes of shares work:
- Preference shares
are the shares which carry preferential rights in comparison to
other classes of shares. Such rights would usually be a preferred
right to dividend and/or return of capital on winding up, a
specific number of votes during a general meeting and possibly veto
rights. The exact nature and scope of such rights are set out in
the Articles of Association of the company.
A preferred right to dividend would usually mean a right to receive part of the company's profits before the holders of ordinary or other shares are paid. These shares usually have a definite rate of dividend measured as a percentage of the nominal value of the share and such dividend is presumed to be cumulative unless otherwise stated. The priority on the dividend means that although dividends will be paid more regularly, they will be exactly the same and will not increase if more profits are made.
A preferred right on capital return would usually mean the right of the holder of such share to have capital, if any, repaid to them if the company proceeds with its liquidation in priority to the holders of ordinary or other shares .
If such right is attached to a class of shares then one may argue that these shares are a more secure investment than ordinary shares, as they are more likely to have capital returned even where there is insufficient capital remaining to pay all shareholders.
A preferred right of votes would usually mean that such shares shall carry a specific number of votes, notwithstanding the % of actual shares held vis-à-vis the total number of shares issued. For example, it may be provided in the articles of association that one preferred share carries 3 votes whereas an ordinary only 1 vote, per share.
A veto right, is usually the right of the holder of such shares to "veto" the passing of a resolution or decision at a shareholders' general meeting. As veto rights may be deemed unenforceable, usually the articles are drafted in such a way whereby the holder of such shares is granted with such number of votes capable to block the passing of a specific resolution. For example, if the resolution relates to the amendment of the articles, which requires a special resolution under applicable law, the holder of such preferred shares is granted with such number of votes so that to block the passing of the special resolution in respect to this specific matter.
- Ordinary shares (equity shares) are the vast majority of shares found in private companies and carry all rights vested to the shareholders of the Company pursuant to applicable law, and such other rights as from time to time may be set out in the articles of association of the company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.