Shareholding structure refers to the way in which shares are distributed among shareholders. There are used are used to protect and manage company assets, liabilities and ownership rights. They can be complex, but this article will serve as a guide for you to understand the basics of shareholding structure options in Singapore.
What are shares?
A share is simply a slice of a company that has been issued. In essence, shares represent ownership of the company and shareholders can vote and receive dividends.
In Singapore, companies issue different types of shares:
Companies issue different classes of shares to accommodate their growing number of stakeholders. There are no legal definitions for share classes, and shares with the same name can have different rights in different companies. Some typical classes of shares and their rights are described below:
#1 Ordinary Shares
Overview: Ordinary shares represent the most prevalent class and serve as the foundation of ownership in a company.
Rights:
- Carry one vote per share.
- Receive equal dividends.
- Distribute residual assets among shareholders after settling all debts in case of liquidation.
#2 Non-voting Shares
Overview: Non-voting shares grant no rights to vote or attend general meetings, often issued to employees or members of shareholders’ families.
Rights:
- No voting rights.
- Remuneration paid as dividends, offering potential tax efficiency.
#3 Redeemable Shares
Overview: Redeemable shares are issued with the understanding that the company will buy them back at a future date, commonly associated with non-voting employee shares.
Rights:
- Buyback at a fixed or director-determined future date.
- Often tied to non-voting shares for employee compensation.
#4 Preference Shares
Overview: Preference shares, often non-voting, provide guaranteed dividends and come in cumulative or non-cumulative forms.
Rights:
- Guarantee dividends, with variations in cumulative or non-cumulative entitlement.
- Cumulative preference shares grant priority in receiving payments.
#5 Management Shares
Overview: Management shares carry additional voting rights designed to maintain control within specific hands.
Rights:
- Extra voting rights, achieved through methods like conferring multiple votes per share or having a smaller nominal value.
- Used to retain control after issuing shares to external investors.
#6 Employee Share Options
Overview: Employee share options are tools to attract and compensate employees, aligning their financial interests with the startup’s performance.
Rights:
- Rights to purchase shares at a predetermined price within a specified timeframe.
- Motivational tool linking employee performance with startup success.
In general there are three key shareholder rights:
1. Voting Rights: The Pillar of Control
Overview: Voting rights are the cornerstone of a shareholder’s influence in the decision-making processes of a company. Typically, ordinary shares carry one vote each at general meetings, providing a democratic representation of ownership.
Flexibility Through Ownership Classes: Companies, as exemplified in the Google case, have the flexibility to modify voting rights. This may involve the issuance of non-voting shares, shares with multiple votes (e.g., 10 votes per share), or shares with limited voting rights. Founders, in particular, should prioritize this right as it directly impacts their ability to steer the company’s direction.
2. Profit-Sharing Rights: Dividends and Diversity
Overview: Profit-sharing rights revolve around the distribution of a company’s profits in the form of dividends. The amount allocated per share is a crucial aspect of shareholder returns.
Ownership Class Influence: The company’s Articles of Association play a significant role in dividing shares into different classes, allowing for varied dividend allocations. Directors or shareholders may have the authority to distribute different amounts of dividends to distinct classes of shares. This flexibility accommodates diverse shareholder preferences and company strategies.
3. Liquidation/Winding-off Rights: Ensuring Fair Distribution
Overview: In the event of a company’s liquidation, shareholders look to the division of remaining assets after settling all debts. Generally, residual assets are distributed proportionally based on each shareholder’s interest in the company’s share capital.
Ownership Class Dynamics: When shares are divided into different classes, the company’s Articles can outline priority rights in the distribution of residual assets. This ensures a fair and structured process, offering certain classes of shares precedence in the division of remaining assets during liquidation.