4.1 Classes of shares

Classes of shares

  1. Preference shares

They carry preferential rights in relation to other classes of shares. The rights relate to dividend and right to receive proportionate parts of capital during winding up. The rights on preference shares may be stated in the Articles of association.

  1. Redeemable preference shares

Section 520 provides that a company may issue preference shares which are liable to be redeemed. This is only possible under the following conditions:

  1. The company must have shares which are not redeemable e.g. Ordinary shares
  2. Issue of redeemable preference shares must be authorized by the articles
  • The shares must be fully paid at the time of redemption.
  1. Money required for redemption must be from either the proceeds from a fresh issue of shares made for the purpose or out of accumulated profit.
  2. Any premium on redemption must be provide out of profits available for distribution or out of the share premium account.
  3. Redemption of preference shares should not be taken as a reduction of the Company’s authorized share capital.
  • Within one month of redemption notice of the number of shares redeemed must be given to the register.
  1. Ordinary shares

They are also referred to as equity capital. The holders of ordinary shares usually carry the main risk of business as they invest their money without assurance that they will be paid interest on their investment. Holders receive dividends out of profit as determined by directors and declared by members in the Annual general Meeting.

  1. Deferred (Founders) Shares

They are usually issued to the founders or promoters as a reward for their services. They are entitled to dividends only after other classes of shares.

Although their rights depend on the articles, these shares normally take a larger share of surplus assets during winding up than ordinary shares and they also carry greater voting rights.

  1. Employee Shares

A company may have shares issued to employees to encourage them to have a direct interest in the company. This is done through an employee shares scheme managed and administered by a trustee for the benefit of serving employees and those that have rendered exemplary service to the company. Usually employees make no payment for these shares and the shares have no voting rights at company’s Annual general Meeting. They serve as a retirement benefit for employees as they will be able to enjoy dividends and other benefits.

  1. Bonus (Scrip) Shares

These result from payment of dividends in terms of shares instead of cash. It result in capitalizations of profits which then proportionately increases the shares held by each shareholder.