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Introduction First, we will mention about the purpose of this assignment, which is the benefit that we can gain from doing this project. From this project, it helps us to know the types of shares available in a company, definition of shares and the advantages and disadvantages of shares. From the information, this will enable a person who have interest invest in a company, purchase the shares that are suitable for them, based on the comparison between the advantages and disadvantages of each type of shares.
Other than that, we can know the rights that attached to the shares. On the other hand, we will mention that under what relevant case law or relevant sections, the rights of the shareholders will be changed or affected. These circumstances are significant important to those shareholders who want their interest to be protected. For an example, when a company is going to winding up and under the normal situation, preference shareholders will have no right to participate in the surplus assets and profits but under when Section 66 Companies Act 1965, he has the right on it.
Lastly, this project will give a fundamental or basic knowledge of each type of shares, the rights as being shareholders, which is useful in future, if we wish to success in our business field. Definition of shares According to Borlands Trustee v Steel Bros Co Ltd (1901), defines shares as the interest of a shareholder in the company measured by a sum of money, for purpose of a liability in the first place and of interest in the second but also consisting of a series of mutual covenants entered into by all the shareholders inter se.
According to Section 4 Companies Act 1965 (hereinafter referred as CA’65) defines share as share in share capital of a corporation and includes stock except where a distinction between stock and shares is expressed or implied. In short, shares means that is the capital raised by a corporation, through the issuance and sale of shares. Section 98 CA’65 mentions the nature of share. The share or other interest of member in a company shall be moveable property, transferable in the manner provided by the articles, and shall not be of the nature of immovable property.
It means that shares are movable properties, intangible in nature, chooses in action and transferable in nature unless the company is a private company. As according to Section 15 CA’65 private company has restriction of transferring share unless get the consent of all the members. There are various type of share in the market, such as ordinary share, preference share, deferred share, treasury share and others. However, the common one is ordinary share and preference share. Definition of Ordinary Share According to WorldReference. om Dictionary, ordinary share is share other than preferred share; entitles the owner to a share of the corporation’s profits and a share of the voting power in shareholder elections. Definition of Preference Share Section 4 CA’65 defines preference share a share by whatever name called, which does not entitle the holder thereof to the right to vote at a general meeting or to any right to participate beyond a specific amount in any distribution whether by way of dividend, or on redemption, in a winding up or otherwise.
According to WorldReference. com Dictionary, preference share is share whose holders are guaranteed priority in the payment of dividends but whose holders have no voting rights. Benefits of Ordinary Share There are several advantages for subscribing the ordinary shares rather than preference shares. First, as an ordinary shareholder, he is a proprietor or owner of the company. A shareholder is entitled to membership rights of the company. It means that a shareholder as a member of the company has full voting rights at any general meeting.
Through voting, a shareholder can participate in the management of the company. If the shareholder holds the majority rights (more than or equal to 51% of the rights) he can control the company financial and operating. Section 55 CA’65 says each member of a public company has one vote in respect of each ordinary share. Besides that, as a member of the company, he has the right to receive the notice of general meeting, to request the financial report, to attend and speak during the general meeting, to appoint the director during the general meeting.
Moreover, he has the right to appoint proxies in the event that they cannot themselves attend the general meeting. As an ordinary shareholder, when the company is making a lot of profit, or in other word, in the event the company is prosperous, he stand to gain the most than preference shareholder as their dividend is higher compare to the fixed rate dividend received by preference shareholder. Furthermore, in the scenario of company winding up, an ordinary shareholder has the right to participate a share in any surplus assets of the company plus the repayment of his capital.
Besides that, the Articles of Association require the company to offer any further shares it proposes to issue to the ordinary shareholders before offering them to outsiders, and usually the new shares are offered to the existing shareholders at a lower price than they would be offered to the outsiders. Disadvantages of Ordinary Share As a member of the company, ordinary shareholder is the main risk bearer of the company. It means that these shares carry a right to a dividend limited only by the size of the profit made by the company and are paid after the preference shareholders.
They will be the last to receive the dividend. The dividend receive is in the form of non-cumulative dividend and the rate of dividend is not fixed, means when company did not declared dividends for this year, the dividends will not accumulated to next year and the amount is not secured. Under Section 365 CA’65, dividends are only payable out of the company’s profit. In the event that there are no profits, they will not receive any return of their investment. In fact, the company has no obligation to declare and pay dividend as the director can retain profits or capitalize the profits in the form of bonus share.
However, when the company is making profit continuously for some years but director does not declare any dividend, the shareholders can apply to the court and sue the company under Section 33(1) CA’65 where Memorandum of Association and Article of Association constitute contractual effect between company and members, and where members right are affected, they can sue the company. In the scenario of winding up, ordinary shareholders will be the last to receive the repayment of capital. The next disadvantages of ordinary shares s that the issue of shares may result in diluting the shares held by the existing shareholders particularly directors who also are shareholders. It simply means the directors may lose control of the company unless they buy the new shares. Types of Preference Share There are several types of preference share: Cumulative preference share – If the dividends are cannot be paid in one year or the company does not pay the full dividend on preference shares in any year the preference shareholder will be entitled to have the amount deficiency made up in later year before any dividend is paid on ordinary shares.
Non-cumulative preference shares – the holder of such shares are only entitled to the specific rate of dividend out of the current year. If in a year the profits do not warrant payment of a dividend, the arrears are not carried forward to the subsequent year. Participating preference shares – the holders of such shares are entitled to a preferential dividend if the specified fixed rate before the ordinary shareholders. After the ordinary shareholder has received their dividends, the participating preference shareholder will participate further in any profit remaining together with the ordinary shareholders in the surplus assets.
Moreover, they can also participate in surplus of assets with ordinary shareholders when the company is wound up. Redeemable preference shares – these shares may be redeemed by the company at a stated redemption price after a specified time. The redemption must be effected only on such terms and condition and in such manner provided by the Articles of Association. It means that the shares are not redeemable before the specific time and the company must buy back the shares at the price stated and at the specific time.
Convertible preference shares – these shares carry the right to be made convertible, at the option of the holder, into another class of shares, normally into ordinary shares. General Advantages of Preference Shares Unless the Articles of Association or otherwise provided, generally, preference shares that are issued had the rights to a fixed dividend per share to be paid whenever there is sufficient profit, before any dividend is paid to any other member. The preference shareholders are more secured as ompare to ordinary shareholder as they have the priority to receive their return of investment than ordinary shareholder especially when the company is having ‘bad time’ where the profits is uncertain. Moreover, preference shares are presumed to carry a right to cumulative dividends where their dividends will become payable at the next year. Further more, preference shares are given the right to be repaid the nominal value of each share when the company is wound up before any capital is returned to other members.
They are entitled to be repaid their capital of investment before the ordinary shareholders. General Disadvantages of Preference Shares Unless the Articles of Association or otherwise provided, generally, preference share does not entitle the holder to the rights to vote at a general meeting. Their voting rights to are often limited only during their dividends in respect of the share are in arrears, upon a proposal that affects rights attached to the share (variation of class rights), or upon a proposal to wind up the company.
In short, they have limited right to vote, no right to attend general meeting, limited right to some of the company decision making. Thus, when a company is going to raise fund, they are willing to issue further preference share rather than ordinary share because of the limited voting rights. Even though directors issued more preference share to the stranger (public), they still maintained their majority voting and financial control of the company.
Therefore, preference share are the best alternative for the directors of the company. The next disadvantage is they have no rights to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up or otherwise. Different from the ordinary share, preference share is paid in a fixed dividend rate. They cannot participate in the surplus of profit or assets during the company are wound up. Thus, they have less return of investment especially during the company prosperous time.
Rights of Holders of Preference Shares to be set out in the Memorandum of Association or Articles of Association Section 66(1) Companies Act 1965 mention no company shall allot any preference shares or convert any issued shares into preference share unless there is set out in its memorandum or articles the rights of the holders of those share with respect to: Repayment of capital – it should state that when the company is winding up, they would have the right to claim the nominal value of each share before any capital is returned to ordinary shareholder.
Participation in surplus assets and profits – it should state that when the company is winding up and there is surplus of assets and profits, the preference shareholders entitled to have a share of it with the ordinary shareholders. Cumulative or non-cumulative dividends – it should state that the preference shareholders would receive either cumulative dividend as according to general rules or non-cumulative dividends as same as ordinary shareholders. Voting – it should state that either the preference shareholders would have the rights to vote in meeting or not.
Priority of payment of capital and dividend in relation to other shares or other classes of preference shares – it should state that either the preference shareholders or ordinary shareholder have the priority to the issued or payment of capital or dividends or both of have the same priority? The purpose for such requirement is to enable the prospective and existing preferential shareholders to ascertain easily the rights attached to their shares. Section 66(2) CA’65 mention if default is made in complying with this section the company and every officer of the company who is in default shall be guilty of an offence against this Act.
Penalty: Two thousand ringgit CONCLUSION Our assignment topic is “explain the different classes of shares and the benefits and disadvantages of each type of shares. ” In our presentation, we had discussed about the different classes of share that is – ordinary shares and preference shares. We had explained about the definition of ordinary share and preference share and their characteristics. Beside that, we also discuss about the benefits and disadvantages of them. In our opinion, both of them got their advantages and disadvantages.
When company is decide whether to issue ordinary shares or preference shares are depending on the situation. If the director wishes to maintain the control over the company then they should issued preferences shares to raised capital rather than issuing ordinary shares. However, the company also needs to consider the ability of paying back the interest and capital if issued the preference shares as they deem as external creditors that have the priority of repayment of capital than ordinary shareholders.