Classes of Shares

Classes of Shares:

The capital of a company is divided into distinct units of fixed value known as shares. According to Farewell J in Borland’s Trustee v. Steel Bros. (1901) 1 Ch 279, a share represents a shareholder's interest in the company, quantified in monetary terms for liability and interest purposes. It also involves mutual covenants agreed upon by all shareholders. Shares can be similar, carrying identical rights and liabilities. Two main classes of shares are:

1. Equity Shares/Ordinary Shares:

Ordinary shares, also known as equity capital, signify ownership in the company. Holders of ordinary shares receive a major share of the company's profits during dividend distributions and bear a significant portion of financial losses. These shares rank for the return of capital after preference shares. In solvent winding-up, ordinary shares claim the surplus assets pool after returning capital to other shareholders. Each ordinary share usually carries one vote, granting voting control in general meetings.

2. Preference Shares:

Preference shares meet two conditions: they have preferential dividend rights at a fixed amount or rate, and they possess preferential rights in capital repayment during winding-up. Preference shares can be of various types:

a. Cumulative or Non-cumulative:

- Non-cumulative: Receives a fixed percentage dividend annually; unpaid dividends are not carried forward.

- Cumulative: Allows the accumulation of unpaid dividends, which can be claimed when profits are available in subsequent years.

b. Redeemable and Non-Redeemable:

- Redeemable: Repaid by the company after the specified term; conditions apply as per the Companies Act.

- Non-Redeemable: Not repaid except on the company's winding-up.

c. Participating or Non-participating:

- Participating: Entitled to a fixed-rate preferential dividend and can share in additional profits after a certain rate on equity shares.

- Non-participating: Earns dividends at a fixed rate without further participation in surplus profits.

Other Types of Shares:

• Deferred or Founders Shares:
  Issued to founders, these shares provide profit participation if dividends on ordinary shares surpass a set amount. Rights are outlined in the memorandum or articles.
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• Corporate Shares:
  Created for issuance to employees, corporate shares serve specific purposes. Issued by the company to its employees, they are fully paid up and often come without voting rights but with dividend entitlements. Trustees manage these shares when employees leave the company.