Classes of Shares – Ordinary Shares vs Preference Shares – Companies Act 2016 (the Act)
A share represents an interest of a shareholder in a company and classified as a personal property which is transferable as defined in Section 70 of the Companies Act 2016 (the Act). A company may issue different classes of shares, which enjoy different rights and benefits to the holders of the shares. The most common classes of shares are ordinary and preference shares. Both shares are typically issued for the sole purpose of raising capital and one class of shares is preferred and offered over another mainly to address the risk appetite of investors. Ordinary shares are not defined in the Act but are referred to as equity shares. Consecutively, equity shares are defined in the Act as any share other than preference share. For simplicity purposes, this article uses the term ordinary shares to make distinction from preference shares.
Should a company wish to issue different classes of shares, i.e. combination of ordinary and preference shares, the company must indicate in its constitution as required by Section 90 of the Act that the capital of the company has different classes of shares and the corresponding voting rights attached to each class of shares.
Private company is prohibited from offering shares to the public. Any issue of shares must be performed in a private manner to friends, relatives, employees or customers without contravening section 43 of the Act. Generally, offering shares to persons, such as family members or close associates or persons already connected to the company are allowable. Issuing prospectus and/or offering large number of shares or other similar acts may be deemed an invitation to the public, therefore can be punished under Section 43(5) of the Act which carries a prison sentence not exceeding five years or a maximum fine of RM3mil or both, upon conviction. Further, provisions of Capital Market Services Act 2007 must also be adhered. With regards to share certificate, there is no requirement to issue share certificate unless specifically requested by the shareholders.
The followings are brief distinction between ordinary shares and preference shares, including its variations as prescribed by the Act.
Ordinary shares and their rights
The holder of ordinary shares is given all the rights that are specified in the Act as well as those rights contained in the company’s constitution, if the company has adopted one.
Section 71(1) of the Act confers ordinary shareholders the following rights:
(a) Right to attend, participate and speak at a meeting.
(b) Right to vote on a show of hands on any resolution of the company.
(c) Right to vote for each share on a poll on any resolution of the company.
(d) Right to an equal share in the distribution of surplus assets of the company.
(e) Right to an equal share in dividend authorized by the Board of Directors.
Based on the above, it is very clear that the ordinary share would give the holder both the distribution rights as well as control rights.
Preference shares and their rights
The holder of preference shares enjoys certain rights not given or attached to the holder of ordinary shares. Preference shareholders will enjoy a right to receive a preferential fixed dividend before ordinary shareholders are paid their dividends. The dividends can be either cumulative or non-cumulative, in nature. Other terms such as redeemable, participative and convertible can also be attached to the preference shares.
Preference shares can be either be classified as liability or equity depending on the terms of the preference shares for financial reporting purposes. It largely depends on the contract obligation attached to the preference shares, for example, mandatory redemption of the preference shares at a future date and at fixed or predetermined price is most likely warrant a liability classification for financial reporting purposes and compliance with approved accounting standard. In contrast, those without a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity.
In addition to the above, preference shareholders may be entitled to the following rights if these rights are expressly stated in the company constitution. The rights are:
(a) A priority over ordinary shareholders regarding return of their capital in the event of winding up.
(b) The right to receive in surplus profits during the normal course of the business
(c) Right to receive surplus assets in the event of winding up (the available net assets of the company upon winding up).
It is important to note that Section 90(4) of the Act prohibits the allotment of preference shares or conversion of any shares into preference shares unless expressly written in the constitution of the company.
Please browse here for additional guidance on preference shares.
Variation of class rights
Variation of class rights of ordinary and preference shares refer to the alteration or modification of the terms attached to the respective shares if the constitution of the company allows it. If no such provision exists in the constitution, written consent by way of resolution is required from the shareholders of a particular class for the intended variation. Section 91(1) of the Act outlines these conditions in detail.
For example, the new issue of preferential shares ranking pari passu or in priority with the terms and conditions of existing preferential shares of the company shall be deemed to be act of variation to the rights attached to those preference shares unless the terms of new issues of the preference shares are allowed by the term of issue of the existing preference shares or by the constitution of the company at the time of issuing. This is specified in Section 91(5) of the Act.
Altering the class rights of preference shares from non-convertible to convertible to ordinary shares is also another example of variation of class rights. This is permissible if allowed by the constitution of the company or approved by shareholders. Otherwise, this alteration can be contested by ordinary shareholders as it would unfairly prejudice to their original rights, thus making the alteration null and void.
It is important to note that sanction on variation of certain class of shares can be made by minority shareholders to the Court in the event of disagreement as specified in Section 93 of the Act. Shareholders of a particular class of shares with not less than 10% of the issued shares may apply to the Court within the stipulated time to have the variation to be cancelled. The Court may disallow the variation if it is satisfied that the variation would unfairly prejudice the class shareholders. The decision of the Court is final and must be rectified by the issuer of the shares within the given time.
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