Company shares are a form of security that proves or represents the extent of ownership a shareholder has in a company. It is common for a company to issue different types of shares, and each type of shares provides different rights to its holders. The types of shares that can be issued by Malaysian companies are governed under Section 69 of the Companies Act 2016:
69. Types of shares
Subject to the constitution of the company, shares in a company may-
(a) be issued in different classes;
(b) be redeemable in accordance with section 72;
(c) confer preferential rights to distributions of capital or income;
(d) confer special, limited or conditional voting rights; or
(e) not confer voting rights.
In Malaysia, the types of shares in a company generally issued to shareholders are ordinary shares and preference shares. The rights and powers attached to ordinary shares are provided under Section 71 of the Companies Act 2016, whilst the issuance of preference shares falls under Section 72 of the Companies Act 2016.
Whether you are a founder, an investor or an acquirer of a company, it is essential to know and understand the difference between the two types of shares, as the type of shares you own will determine your rights in the company. This article explores the differences between ordinary shares and preference shares in a company.
Ordinary Shares vs Preference Shares
A company usually issues ordinary shares to founding shareholders and third-party investors who are actively involved in the company’s management to such extent exercised by ordinary shareholders. Meanwhile, a company issues preference shares to shareholders or third-party investors who are not actively involved in the company’s management but instead intend to reap the prioritised benefits arising from the growth and earnings of the company.
Under Section 71 of the Companies Act 2016, an ordinary share provides its holder with the following rights:
- The right to attend, participate and speak at a meeting;
- The right to vote on a show of hands on any resolution of the company;
- The right to an equal share in the distribution of the surplus assets of the company; and
- The right to an equal share in dividends authorised by the company’s board of directors (although this may be subject to the company constitution).
Meanwhile, preference shares can only be issued by a company if such shares are authorised by its constitution. Regarding the issuance of preference shares, Section 72 of the Companies Act 2016 reads as follows:
72. Preference shares
(1) Subject to its constitution, a company having a share capital may issue preference shares.
Section 72 of the Companies Act 2016 further sets out the provisions for the redemption of preference shares. However, the Companies Act 2016 does not expressly set out the rights of a preference shareholder. Thus, it is essential for a company to ensure that all rights of its preference shareholders are expressly defined and stipulated in its constitution.
Summary of Differences
The main differences between the two types of shares and the respective rights attached to them are set out below:
1. General Overview
Ordinary Share:
Most commonly issued by companies to shareholders upon incorporation.
Preference Shares:
Typically issued to non-founding shareholders, subscribers or investors that prefer specific rights and values of preference shares, which differ from those of ordinary shares.
2. Constitution
Ordinary Share:
Rights do not need to be set out in the company constitution unless the company intends to create different classes of ordinary shares (where there are Class A Shares and Class B Shares) that have different rights.
Preference Shares:
Rights and terms (including their issuance, conversion and redemption) must be expressly set out in the company constitution, as preference shareholders do not enjoy other additional rights.
3. Voting Rights
Ordinary Share:
Allow their holders to participate or vote in company matters requiring shareholders’ resolution. A voting right that is generally attached to ordinary shares is the concept of “one share, one vote”, but a different class of ordinary shares may be adopted by the company in its constitution to allow weighted voting rights that provide that class of ordinary shares additional votes over the other class of ordinary shares.
Preference Shares:
Generally do not confer voting rights to their holders unless the company constitution provides otherwise (if so, usually for certain matters only). However, preference shareholders have a sense of priority whereby dividends are distributed to preference shareholders before ordinary shareholders.
4. Dividends
Ordinary Share:
Dividends are distributed to ordinary shareholders only after preference shareholders receive their dividends. The company’s board of directors will determine the rate of dividends to be distributed to the shareholders depending on the available profits of the company and the company satisfying a solvency test
Preference Shares:
Preference shareholders receive their dividends with priority over ordinary shareholders. The company constitution will usually determine the rate of dividends to be distributed to the shareholders, depending on the availability of the profits of the company and the company satisfying a solvency test
5. Accumulation
Ordinary Share:
Ordinary shareholders cannot accumulate their dividends from previous years.
Preference Shares:
Preference shareholders may enjoy a cumulative right to dividends if the right is expressly provided under the company constitution.
6. Repayment of Capital upon Winding-up of Company
Ordinary Share:
Ordinary shareholders will receive repayment of capital after the company has paid its creditors, followed by preference shareholders
Preference Shares:
Preference shareholders will receive repayment of capital after creditors but before ordinary shareholders.
7. Participation in Surplus Assets and Profits upon Winding-up of Company
Ordinary Share:
Ordinary shareholders will receive repayment of capital after the company has paid its creditors, followed by preference shareholders
Preference Shares:
Preference shareholders cannot participate in the distribution of surplus assets and profits unless otherwise expressly set out in the company constitution.
8. Redemption
Ordinary Share:
Cannot be redeemed or repurchased by a private limited company. In the case of a public company, ordinary shares can be redeemed or repurchased if this is expressly set out in the company constitution.
Preference Shares:
May be redeemed if issued with such an option or right attached to them. These shares are commonly known as “redeemable preference shares”, and their issuance must be provided for under the company constitution. The redemption of redeemable preference shares must satisfy the requirements under Section 72 of the Companies Act 2016 (as mentioned above).
9. Convertibility
Ordinary Share:
Cannot be converted to a different type of shares.
Preference Shares:
Can be converted if they were issued with the option to convert to ordinary shares at such a time and rate that is usually pre-determined. These preference shares are commonly known as “convertible preference shares”.
Conclusion
A company may adopt different classes of ordinary shares (i.e. Class A Ordinary Shares and Class B Ordinary Shares) and different classes of preference shares (i.e. Class A Preference Shares and Class B Preference Shares), all of which come with different sets of rights and functionalities. The categorisation of different classes of shares (i.e. Class A Ordinary Shares and Class B Ordinary Shares) can come in the form of weighted voting rights, which we have written about in this article.
With these different types, classes and nature of shares, it is essential for persons interested in starting a company, investing in a company or acquiring shares in a company to recognise and understand the share structure of that company.
If you would like us to advise you on establishing a share structure for your company (and to adopt such share structure in your company constitution) or if you would like us to conduct due diligence on the share structure of the target company for a potential acquisition exercise, please feel free to contact us below for a free consultation.
By Tommy Wong and Aaron Liew
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
