THE COPPERBELT UNIVERSITY

DIRECTORATE OF DISTANCE EDUCATION

AND OPEN LEARNING
PO. BOX
KITWE

NAME: TIMOTHY NSHIMBI
P.O BOX 20515
KITWE

STUDENT NO.:09175202

PROGRAME: BBA4
COURSE: COMPANY LAW- BBA390
LECTURER: DR P.KAMANGA
ASSIGNMENT :TWO

DUE DATE: 18
TH
JULY 2013

Discuss the different categories of shares in a company and identify
the relevant distinguishing features

In simple words, a share or stock is a document issued by a company, which entitles its holder to
be one of the owners of the company. A share is issued by a public limited company or can be
purchased from the stock market.
A company may have as many different types of shares as it wishes, all with different conditions
attached to them. Generally, share types are divided into the following categories: Ordinary - as
the name suggests these are the ordinary shares of the company with no special rights or
restrictions. They may be divided into classes of different value. Preference - these shares
normally carry a right that any annual dividends available for distribution will be paid
preferentially on these shares before other classes. Cumulative preference - these shares carry a
right that, if the dividend cannot be paid in one year, it will be carried forward to successive
years. Redeemable - these shares are issued with an agreement that the company will buy them
back at the option of the company or the shareholder after a certain period, or on a fixed date. A
company cannot have redeemable shares only.
There are two main types of stocks: common stock and preferred stock.

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to
this type. In fact, the majority of stock is issued is in this form. Common shares represent
ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote
per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost
every other investment. This higher return comes at a cost since common stocks entail the most
risk. If a company goes bankrupt and liquidates, the common shareholders will not receive
money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with
the same voting rights. (This may vary depending on the company.) With preferred shares,
investors are usually guaranteed a fixed dividend forever. This is different than common stock,
which has variable dividends that are never guaranteed. Another advantage is that in the event of
liquidation, preferred shareholders are paid off before the common shareholder (but still after
debt holders). Preferred stock may also be callable, meaning that the company has the option to
purchase the shares from shareholders at anytime for any reason usually for a premium.

Some people consider preferred stock to be more like debt than equity. A good way to think of
these kinds of shares is to see them as being in between bonds and common shares.

Different Classes of Stock
Common and preferred are the two main forms of stock, however, it is also possible for
companies to customize different classes of stock in any way they want. The most common
reason for this is the company wanting the voting power to remain with a certain group;
therefore, different classes of shares are given different voting rights. For example, one class of
shares would be held by a select group who are given ten votes per share while a second class
would be issued to the majority of investors who are given one vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A
and Class B.
This is done to create some small difference between the different classes, for example. to allow
the directors to pay different dividends to the holders of the different share classes, or to create
deadlock articles, or to distinguish between the shares so that different rules apply for share
transfers. There can also be ordinary shares in the same company that are of different nominal
values, for example KR1 ordinary shares and 10n ordinary shares. If each share has one vote
regardless of its nominal value, the holder of the 10n shares will get 10 votes for every KR1 paid
for them, while the holder of the K1 shares only gets one vote per K1.
Non-voting shares
Non-voting shares carry no rights to attend general meetings or vote. Such share are widely used
to issue to employees so that some of their remuneration can be paid as dividends, which can be
more tax-efficient for the company and the employee. The same is also sometimes done for
members of the main shareholders' families. Preference shares are often non-voting.
Redeemable shares
These are shares issued on terms that the company will, or may, buy them back at some future
date. The date and terms may be fixed for example, that the shares will be redeemed five years
after they are issued, perhaps at a price different from their nominal value. This can be a way of
making a clear arrangement with an outside investor.
They may also be redeemable at any time at the company's option. This often done with non-
voting shares given to employees so that, if the employee leaves the company his shares can be
taken back at their nominal value. There are statutory restrictions on the redemption of shares.
The main requirement, like a buy-back, being that the company may only redeem the shares out
of accumulated profits or the proceeds of a fresh issue of shares, unless it makes a permissible
capital. Preference shares are often redeemable
Preference shares
These will usually have a preferential right to a fixed amount of dividend, expressed as a
percentage of the nominal (par) value of the share, for example. a K1, 7% preference share will
carry a dividend of 7n each year. It is, however, still a dividend and payable only out of profits.
The dividend may be cumulative for example, if not paid one year then accumulates to the next
year, or non-cumulative. The presumption is that it is cumulative. The dividend is usually
restricted to a fixed amount, but alternatively the preference share may be participating, in which
case it participates in profits beyond the fixed dividend under some formula. Preference share are
often non-voting except when their dividend is in arrears. They are sometimes redeemable.
They may be given a priority on return of capital on a winding up. Often they will not be entitled
to share in surplus capital.
Deferred ordinary shares
Shares on which no dividend is paid until other classes of shares have received a minimum
dividend. Thereafter they will usually be fully participating.
Management shares
A class of shares carrying extra voting rights so as to retain control of the company in particular
hands. This may be done by conferring multiple votes to each share, for example, they carry ten
votes each, or by having a smaller nominal value for such shares so that there are more shares
and so more votes per K1 invested. Such shares are often used to allow the original owners of a
company to retain control after additional shares have been issued to outside investors.
Other classes
Any class of shares may be created. Sometimes different classes are set up for particular
purposes, such as the following arrangements:
Voting shares, dividend shares, capital shares
Sometimes three classes of shares are created with class 'A' having all the voting rights, class 'B'
having all the dividend rights and class 'C' having all the capital rights. It is then possible for the
different shareholders to have different percentages of the rights for these purposes. As a simple
example, Shareholder 1 may have 40% of the voting rights ('A' shares), 50% of the dividend
rights ('B' shares) and 60% of the capital rights ('C' shares). Shareholder 2 then has 60% of the
votes, 50% of the dividends and 40% of the capital.
Deadlock articles
In a company with two investors, A and B perhaps a joint venture between two unrelated
companies, the company may have two classes of shares, A shares and B shares. The shares may
carry the same rights but are intended to protect both A and B in certain ways, for example, the
articles may provide for, say, two directors to be nominated by the holders of the A shares and
two by the holders of the B shares.
Changing the class rights
There is some statutory protection given to the holders of a class of shares against the rights on
their shares being altered. A minority class of shares, or a class of non-voting shares, would
otherwise be vulnerable to the rights on those shares being altered by the majority for example
by altering the articles by special resolution. This is known as a variation of class rights.

Professional investors buy shares in the hope of benefiting from a rising stream of income over
the long term. Shares entitle their owners to vote at a company's Annual General Meeting and to
receive a proportion of distributed profit in the form of a dividend (or to receive part of the
company's residual value if it goes into liquidation).

A publicly quoted company has to fulfill a large number of requirements, including sending their
shareholders an independently audited report every year, containing the year's trading results and
a statement of their financial position.

Now let's examine shares closely. The fact of issuing shares for the first time is known as
floating a company or making a flotation. Companies generally use an investment bank to
underwrite the issue, i.e. to guarantee to purchase all the securities at an agreed price on a certain
day, if they cannot be sold to the public.

Companies wishing to raise more money for expansion can sometimes issue new shares, which
are normally offered first to existing shareholders at less than their market price. This is known
as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it
into capital by issuing new shares to shareholders instead of paying dividends. And this is knows
as a bonus issue.

There are a number of different types of shares. Ordinary shares are the most common shares,
also known as equities. The ordinary shareholders bear the largest part of risk, but the returns can
be much higher than with other forms of investment. Ordinary shareholders are entitled to one
vote per share, which gives them more say in the running of a company, but the amount of
dividend they receive (if any) is determined by the company depending on how much profit has
been made.

Preference shares have a fixed dividend which must be paid before the ordinary shareholders can
receive their dividend, which guarantees a return on investment as long as the company is
making profit. However, if the company doesn't make a profit, the preference shareholders will
not be paid their dividends either. Unlike the ordinary shareholders, the preference shareholders
are not entitled to vote in company matters.

Preference shares can be of two types: cumulative preference shares and convertible preference
shares. Cumulative preference shares is a special of preference shares which offers a safer return
on investment. This is because if the company cannot pay the dividend one year, the outstanding
amount is carried over to the following years. That means that rather than losing his dividend in a
year where the company runs at a loss, the shareholder can expect to receive it one or more years
later along with the dividend from the following years.

Convertible preference shares is another type of preference shares which pays a fixed rate of
interest until a certain time. After this time it is converted into an ordinary share on which the
holder receives a dividend rather than interest.

And in the end I would like to say that the choice of shares depends on readiness of an investor
to risk.
Most shareholders regard the company as a place in which they can invest their money and
expect a return in the form of a dividend at the end of the day. They provide the capital while the
power to run the company is delegated to directors. Basically there are two types of investor,
those looking for growth and those looking for income, and usually shares provide a mixture of
the two.

By first looking the nature of the share the Companies Act 1985 defines it as an item of personal
property transferable in the manner provided by the company's articles. It is stated that in fact a
share is a chose in action, one of those property interests which do not give the owner the right to
posses anything tangible. Furthermore, share are described as the interest of the shareholder in
the company, measured by a sum of money which for the most part can be used for the purpose
of liability and of interest if necessary, consisting of a various covenants entered into by all the
shareholders. As a general rule a share is not a sum of money, contrary is just an interest which is
measured by a sum of money. Thus, this theory seems to be that the statutory contract,
constituted by the articles of association, defines the nature of the rights which are not purely
personal rights but as an alternative confer some kind of proprietary interest in the company
though not in its property.

There is a presumption by the law that all shares confer the same rights and impose the same
liabilities. Nevertheless, a registered company may divide its share capital into different classes,
although this would be relatively unusual for a private company. The power to create shares with
varying rights is normally contained in the articles of association, or in certain circumstances in
the memorandum of association. It is very important to express these rights because a
shareholder may rely upon these rights in the case of a winding up. In the worst case scenario
where there is a conflict between the articles of association and the memorandum as what rights
are conferred on the particular class of shareholders the memorandum prevails.

Currently every company is required to file with the registrar details of the all shareholder's
rights not contained in documents already filed. Whatever new shares are allotted by a company
with rights different from its existing shares a new statement of the rights must be filed with the
registrar.
Moreover, there are many classes of shares, including ordinary shares, preference shares and non
voting shares. Their classification depends on the rights associated with the shares. It is
persuasively established that a member of a company who has more capital than another will
want a greater share in contributions of the company's profits and also a greater influence on the
company's dealings. This may also depend to the number and class of shares of the company that
the member may hold. Thus, each share is required to have a sum of money assigned to it as its
nominal value. Consequently, a description of each member's shareholding must be entered in
the company's register of members.
Ordinary share which distinguishes from other types of shares, are the most usual type of share.
The most common stock market investment is to deal in ordinary shares. These are the shares
that are usually referred to when discussing the company's share price. Ordinary shares confer
upon the holder a share in the ownership of the company with each share entitling the holder to
an equal share of the profits and vote at company meetings. Profits will be distributed by way of
dividends and are paid net of tax.

These shares are sometimes referred to as equity in the company. Of all the types of shares they
carry the greatest risk but when it comes to payment shareholders may receive the greatest
return. The nominal value of shares is fixed but the exchange value of the shares in the stock
market varies in relation to the performance of the company and the awareness of those dealing
in the Stock Exchange.

Despite the articles and the memorandum of association, an ordinary shareholder is entitled to
receive dividends, in order to have his appropriate proportion of the company's assets in the case
of a winding up and also to exercise one vote for each share that he holds at the general meetings
of the company. However, the holder of an ordinary share is not confined to receive back the
value of his share if the value of the assets available for distribution among the ordinary
shareholders goes beyond the nominal amount of the issued ordinary shares.

Likewise, as mentioned above another important type of share is preference share. The basic
principle of preference shares is that they pay investors a dividend at a fixed rate. A company
which needs new capital and rather issuing ordinary shares, preference shares may be issued at a
guaranteed annual dividend, and as the company's own capital. The preference share is primarily
an income instrument but it does not offer a fixed income. The capital value of these shares can
not rise much from their current levels. If interest rates are to rise, the dividend of the share will
with out any doubt be adjusted upwards, but investors should know that in such situations it will
not cause the value or the price of the share to rise much. Basically there is no possibility of any
capital growth on these shares.

Moreover, they do offer investors a good cover against a possible rise in interest rates, since the
cash dividend that is declared is calculated carefully on the strength of the willing prime interest
rates. It is therefore a good investment in an environment of rising interest rates. In the case of
falling interest, it offers the investor no protection, because the dividends also pursue the fall in
interest rates. Preference shares are considered less risky than ordinary shares because they are
higher up the pecking order should the company be liquidated. Similarly their dividend is paid
before that of ordinary shares and so is more secure, though not guaranteed. But it is important to
note that they are still shares, and the holders of preference shares are members of the company.
Nevertheless, they contain a mechanism which allows the investor to call for conversion into
ordinary shares in sufficient numbers to pay back the original issue price of the hybrid.

These shares involve less risk than ordinary shares. They may have priority over ordinary shares
in two respects, dividends and repayment. In addition, preference shares carry a fixed rate of
dividend. The important point to note, however, is that this fixed dividend has to be paid before
any payment can be made to ordinary shareholders. The dividend payments made to preference
shares are usually less than that enjoyed by ordinary shares. Such rights are cumulative unless
otherwise provided. This means that a failure to pay a dividend in any one year has to be made
good in subsequent years before the current payment of the ordinary dividend. In the event where
the dividend. Dividends are usually fixed at a certain percentage, though where stock is
participating, investors are entitled to a share in profits should they reach a certain level.

Consequently, the main benefit to owning preference share is that the investor has a greater claim
on the company's assets than ordinary shareholders. Preferred shareholders always receive their
dividends first and, in the event the company goes insolvent, preferred shareholders are paid off
before ordinary shareholders. In general, preferred shareholders have a greater claim on the
company's assets than ordinary shareholders do.

Should the company wind up operations, preferred shareholders are paid any obligations owed to
them. Should a dividend be suspended by the Board of Directors, for what ever reason, the
preferred share usually has a cumulative clause in it allowing that any unpaid dividends must be
paid fully before any dividends may be declared and paid to holders of common stock. This
means that the preferred share is a relatively more secure investment. The company issuing
preferred shares may add differing features to the share in order to make it more attractive.

A dividend paid on cumulative preference shares that the company is liable for in the next
payment period if not satisfied in the current payment period. Unlike a dividend on common
stock that the company can pay out to shareholders if they want, dividends on cumulative
preferred shares are an obligation regardless of the earnings of the company. The unpaid
accumulated preferred stock dividends must be paid before any common stock dividends are
paid.

Most irredeemable preference shares are issued by banks and insurers. The banks take this route
to raise capital to cover liabilities. This type of company is likely to be with us for many years,
so preference shares should be a safe investment.

Moreover, preference shareholders are entitled to vote at class meetings convened to consider
any alteration to their particular rights, however, with the added security offered by the
guaranteed dividend stream, the holder of preferred shares gives up the right to vote on issues
related to corporate governance. Therefore, the preferred holder has little input into corporate
policy. Without specific provision, preference shares have the same rights as ordinary shares; but
it is usual for their voting rights to be restricted. The rights attached to particular classes of shares
are of great importance to those who hold them and the law is particularly sensitive to provide
protection to those parties. In most cases any alteration will require the approval of the majority
of those holding such class rights, and even then it may be subject to challenge in the courts.

Likewise, some companies have a class of members whose rights to dividend and to share in
additional assets are like those of ordinary members but who have no right to vote at members'
meetings. In such a company there is usually a small class of members who hold ordinary shares
with a right to vote and entry to this class is carefully controlled.

Warrants are also to be regarded as a highly risk investment. They are not shares themselves, but
give their holders a right to buy certain shares at a fixed price and by a certain date in the future.
In the case of Scottish National, a split capital investment trust, they conferred the right to buy
the highly geared capital shares, which are themselves highly risky. Even though in such
situations, highly geared capital shares, the risk is really high, there can be high rewards, and if
you are prepared to accept such levels of risk, it can be worthwhile learning about split capital
trusts and the opportunities they present.

Their position in the row, and the nature of their entitlement, is the key to understanding how
risky and how rewarding that particular share class might be. At the head of the row are zero
dividend preference shares. These promise a fixed return on deliverance. The risk of a broken
promise is almost always negligible.
If a shareholder is not satisfied with his current shares, convertible preference shares confer upon
the holder the right to convert into ordinary stock at specific set dates. This means that income
seeking investors can take advantage of the usually higher dividend with a view to converting in
the future, supposed conditions be appropriate.

Conclusively, it is clear that there is no limit to the classes of shares which can be created, even
within a single company. This kind of shares often issued to promoters, in respect of which the
receipt of a dividend was deferred until after the preference and ordinary shares had been paid a
dividend at a specified rate. Even though this kind of shares used to be common nowadays is
rare. As an alternative, a company may issue shares which, like preference shares carry the right
to a fixed preferential dividend, but on the other hand like ordinary shares carry the right to
participate in surplus profits after their own dividend and a fixed dividend attached to the
ordinary shares have been paid.



References

1. Cases and Materials on Company Law, 5th Ed. 2004, Oxford University Press, Andrew
Hicks & S. H. Goo,

2. Corporate Governance, 3rd Edition, 2004, Blackwell Publishing, Robert A.G. Monks
and Nell Minow

3. Company law: Theory Structure and Operation, by Brian R. Cheffins, Faculty of Law
University of British Columbia, Clarendon Press Oxford 2003.

4. Principles of Modern Company Law, 7th Ed. 2003, London Sweet & Maxwell, Gower
and Davies,

5. Company Law, 7th Ed. 1995, Butterworths , Robert R. Pennington,

6. Consultation Document from the Company Law Review, Modern Company law, 1999

7. The role of Company Directors, 1991, John Davies, ACCA

8. A practical guide to Corporate Governance, Sweet & Maxwell, 1998, Richard Jmerdon,