Put at its simplest, a shareholding is essentially an allocation of shares in a company. A shareholder is someone that owns at least one share in a company. Shares in turn equate to a portion of ownership in a company. The extent of this ownership can differ depending on how many shares are owned. For example, if you own 100% of the shares in a company, you are the sole shareholder and therefore the sole owner. You can own shares in your capacity as an individual, through a company or through a trust. Shareholders invest money into a company in order to buy the shares and can profit from the company when things are going well.
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The primary distinction to be aware of is between public limited companies and private companies limited by shares. Where shares are being offered to the public, they will usually have to be a public limited company. The main difference is that a public company’s shares are typically traded on a stock exchange (meaning that the company is listed) whereas this does not happen for a private company. There are special rules that govern public companies, including that shares in public companies must be issued through an Initial Public Offering (IPO).
Unlike private companies, where shares are generally held by one person or a limited group of people, shares in public companies are offered to the public at large on public stock exchanges, such as the London Stock Exchange. There can therefore be many hundreds or even thousands of shareholders in a large public company. This gives public companies a substantial advantage since they can reach a much wider audience to buy their shares. It also makes buying and selling shares a lot easier. However, more stringent rules are attached to these companies to offer protection.
With public companies there is a minimum allotted share capital requirement, currently £50,000. Private companies do not have the same requirements.
It is not only individuals who can be shareholders, it is also possible for other companies or organisations to hold company shares.
A company’s share capital will often include more than one type of share. This can mean that the consent of more than one class of shareholder will be needed where decisions have to be made.
The most common type of shares are ordinary shares. These carry one vote per share. If a company only has one type of share, then these will usually be ordinary shares. Ordinary shares in a limited liability company (where liability rests with the company as a legal entity as opposed to the individual shareholders) generally grant their holders several rights. These rights include the right to:
Attend general meetings
Vote on who will sit on the board of directors
Exercise one vote per share on a poll
Participate in dividend distributions
Capital on winding up
A company may decide to vary these rights by issuing different classes of ordinary shares, which will usually be labelled ‘Class A Ordinary Shares’, ‘Class B Ordinary Shares’ and so on. It is important to check the different rights that attach to these different classes of shares, for example, there may be different voting rights.
In addition to ordinary shares, a company may also issue preference shares in order to raise capital. These shares provide a fixed amount of dividend at the end of the year. Preference shares rank ahead of ordinary shares in terms of priority of payment of capital and dividends but do not carry the normal voting rights. Such shares can only be issued by a company where this is provided for in the company’s Articles of Association or where the shareholders of a company approve the issue of such shares by special resolution (requiring 75% or more of shareholders to vote in favour).
Another common type of share is deferred shares, which do not have a right to dividends either for a set period or until certain conditions are met. These shares are used to ensure that there is no reduction of capital on a share conversion. Deferred shares rank lower in priority than ordinary shares.
Shares can be a beneficial investment in two ways:
The first is through the payment of dividends where the company has made a profit.
The second is the potential for capital appreciation (a rise in the value of the shares)
Shares can be sold at a profit if they increase in value or can be held onto for a longer period in the hopes that their value will increase even further. This does not mean, however, that shares are not without their risks, the most obvious being that shares decrease in value or a company collapses.
The information on this website is intended as a guide and does not constitute legal advice. Vardags do not accept liability for any errors in the information on this website, nor any losses stemming from reliance upon the statements made herein. All articles and pages aim to reflect the legal position at time they were published, and may have been rendered obsolete by subsequent developments in the law. Should you require specialist advice, tailored to your situation, please see how Vardags can help you.