Preference shares
These shares have the right to payment of a fixed divi-
dend, e.g. 10 per cent of the nominal value, before any
dividend is paid on the other shares. However, there is
no right to such dividend unless the company has suffici-
ent distributable profits to pay it. This is why preference
shares differ from loan capital. Interest on loan capital
must be paid whether the company has distributable profits
or not. If it has no profits, it must be paid from capital
as by a sale of assets or the raising of a further loan.
Once the preference dividend has been paid in full,
the preference shareholders have no right to share in
surplus profit with the ordinary shareholders unless, as
is rare, the preference shares are participating preference
shares. Preference shares may be cumulative or non-
cumulative. If they are cumulative and in any one year
there are insufficient profits to pay the preference divi-
dend, it is carried forward and added to the dividend for
the following year and is paid then if there are sufficient
profits.
So if Eric is the holder of 100 preference shares of £1
each, carrying a preference dividend of 10 per cent, then
if in year one the dividend cannot be paid, the £10 to
which Eric is entitled is carried forward to year two and
if there are sufficient profits in that year Eric will receive
£20. If the shares are non-cumulative, Eric would not
receive the £10 lost in year one, but only £10 for year two
and subsequently.
Ordinary (or equity) shares
These rank for dividend after the preference shares
and sometimes also the terms of issue provide that the
preference shares shall have a right to claim repayment
of capital before the ordinary shares if the company is
wound up.
Ordinary shares, therefore, carry most risk. Generally
they have most of the voting rights in general meetings
and therefore control the company, it being common to
provide that the preference shares shall not have a vote
at all unless their dividend is in arrear. Ordinary shares
receive a fluctuating dividend which depends upon dis-
tributable profits left after the preference dividend has
been paid.
Redeemable shares
Under s 684 a public limited company with a share cap-
ital may, if authorised by its articles, issue redeemable
shares, whether ordinary or preference. Private com-
panies do not require prior authorisation in the articles.
Redeemable shares may be made redeemable between
certain dates at the option of the company’s directors.
The holder thus knows that his shares cannot be
redeemed before the earlier of the two dates, which is
usually a number of years after the issue of the shares
in order to give him an investment which will last for a
reasonable period. He also knows that the shares are
bound to be redeemed by the later of the two dates men-
tioned. However, there are no legal provisions requiring
a company to fix the time of redemption at the time
of issue, and a company may wish to leave the date of
redemption to be decided by the board when financially
convenient.
Redeemable shares may be issued only if there are in
issue other shares which cannot be redeemed. It is not
therefore possible for a company to redeem all its share
capital and end up under a board of directors with no
members. The shares must be cancelled after redemp-
tion. The company cannot hold and trade in redeemed
shares.
The power to issue redeemable equity shares is useful
in the expansion of the small business. Outside investors
often like ordinary share capital with its greater poten-
tial returns in the way of dividend and capital gain, but
the smaller businessman may wish to buy them out after
the business has developed. He can do this by issuing
redeemable ordinary shares. Redeemable preference
shares are less attractive to the speculative investor. They
are safe but carry only a fixed dividend no matter how
high the profits.Purchase of own shares
Sections 690 –708 apply and any company may by
following the procedures laid down in these sections
purchase its own shares, including any redeemable shares- as where the date for redemption has not arrived. The
shareholder(s) concerned must of course be willing to
sell the shares and the company must want to buy them.
The company cannot be forced to buy them, nor can a
shareholder be forced to sell.
The important legal considerations are set out below.
1 Prior authorisation in the articles is not required.
2 The shares must be fully paid. The CA 2006 does not
allow the purchase (or, for that matter, redemption)
of partly paid shares.
3 A company cannot purchase its shares if as a result of
the purchase there would no longer be any member
of the company holding shares other than redeemablePart 2Business organisations