• There will not be a loss of control within the company because the preference shareholders do not have the voting right
• It can be raised for a specific time period at the end of which it can be repaid. Thereafter the company need not pay the preference dividend
• The risk of financing will be less when compared to updating a loan because the preference dividend will be paid only if distributable profits are available.
• The company can collect financing through issue of preference shares because the company can pay an attractive dividend to attract funds in to the company
Sunday, July 25, 2010
Types of Preference Shares
Cumulative Preference Shares
This is where preference shares will be issued within the condition that the unpaid cumulative preference dividend will be carried forward until it is paid.
Non Cumulative Preference Shares
This is where unpaid preference dividend will not be carried forward in the future therefore if the company did not pay a dividend during a particular year then that dividend will be lost to the shareholders forever.
Redeemable Preference Shares
This is where the company will issue preference shares with the condition that the share capital collected will be repaid after a specific time period.
Irredeemable Preference Shares
The company does not expect to repay the irredeemable preference share capital collected. Therefore the company will be paying specified dividend through out the time period over which it is in issue.
Participating Preference Shares
This is where preference shares will be issued with a condition stating that the preference shareholder will be paid the specified dividend plus an additional dividend if the ordinary shareholders are paid a dividend more than a specified amount.
Convertible Preference Shares
This is where the company will issue preference shares with the condition of it being converted in to ordinary shares after a specified time period. Therefore the company does not have to repay the share capital collected.
This is where preference shares will be issued within the condition that the unpaid cumulative preference dividend will be carried forward until it is paid.
Non Cumulative Preference Shares
This is where unpaid preference dividend will not be carried forward in the future therefore if the company did not pay a dividend during a particular year then that dividend will be lost to the shareholders forever.
Redeemable Preference Shares
This is where the company will issue preference shares with the condition that the share capital collected will be repaid after a specific time period.
Irredeemable Preference Shares
The company does not expect to repay the irredeemable preference share capital collected. Therefore the company will be paying specified dividend through out the time period over which it is in issue.
Participating Preference Shares
This is where preference shares will be issued with a condition stating that the preference shareholder will be paid the specified dividend plus an additional dividend if the ordinary shareholders are paid a dividend more than a specified amount.
Convertible Preference Shares
This is where the company will issue preference shares with the condition of it being converted in to ordinary shares after a specified time period. Therefore the company does not have to repay the share capital collected.
Preference Shares
This is a type of shares issued where the shareholders will have a preference over the ordinary shareholders in respect of the following
The preference dividend should be paid before the ordinary dividend if the distributable profits are available
At the time of the liquidation the preference share capital should be paid back before the ordinary share capital
The preference dividend should be paid before the ordinary dividend if the distributable profits are available
At the time of the liquidation the preference share capital should be paid back before the ordinary share capital
Rights of Ordinary Shareholders
The right to vote
All ordinary shares issued except for non voting ordinary shares will have the right to vote
The right to receive a dividend if the directors have proposed a dividend
A right to receive a copy of the annual report
The right to transfer the ownership of shares
The right to receive a portion of the remaining assets at the time of liquidation
The right to demand the directors to issue shares to the existing shareholders before issuing any shares to outsiders. This will be called the pre-emption right
All ordinary shares issued except for non voting ordinary shares will have the right to vote
The right to receive a dividend if the directors have proposed a dividend
A right to receive a copy of the annual report
The right to transfer the ownership of shares
The right to receive a portion of the remaining assets at the time of liquidation
The right to demand the directors to issue shares to the existing shareholders before issuing any shares to outsiders. This will be called the pre-emption right
Disadvantages of Issuing Ordinary Shares
• There will be a higher cost because the company which is issuing the shares will have to prepare a document call a ‘prospectus’ inviting general public to purchase shares of the company. The company will have to advertise which will lead to a cost to the company. The company may enter into an underwriting agreement where the company which provides the underwriting agreement will agree to purchase any shares not taken up (subscribed) by the investors.
Generally the underwriters would charge 2.25% of the value of the shares issued by the company. This amount should be paid irrespective of whether the shares are subscribed by the investors or not. In addition the company may have to obtain legal advice for which there can be a cost.
• Loss of Control due to issue of shares the company may find its original shareholders loosing the control within the company.
• It will be time consuming to issue shares because the company will have to prepare the necessary documents, advertise and carry out the share issue if it is to be successful.
• Due to the ordinary shareholders taking a higher risk they should be compensated with a higher return which will lead a higher cost to the company. This will lead to high cost of capital.
Generally the underwriters would charge 2.25% of the value of the shares issued by the company. This amount should be paid irrespective of whether the shares are subscribed by the investors or not. In addition the company may have to obtain legal advice for which there can be a cost.
• Loss of Control due to issue of shares the company may find its original shareholders loosing the control within the company.
• It will be time consuming to issue shares because the company will have to prepare the necessary documents, advertise and carry out the share issue if it is to be successful.
• Due to the ordinary shareholders taking a higher risk they should be compensated with a higher return which will lead a higher cost to the company. This will lead to high cost of capital.
Advantages of Issuing Ordinary Shares to a Company
The ordinary dividend will be paid only if distributable profits are available and if the directors decide to pay a dividend therefore there will not be a fixed commitment to pay a dividend to the ordinary shareholders.
The amount of ordinary share capital collected will not be repaid until liquidation of the company. Even at liquidation it will be repaid only if assets remain after settlement of other liabilities.
No security will be needed when issuing ordinary shares when compared to loans where assets should be kept as security
The company has the ability to attract large amounts of money as capital
The ordinary shares can be issued because there is a ready market for it.
The amount of ordinary share capital collected will not be repaid until liquidation of the company. Even at liquidation it will be repaid only if assets remain after settlement of other liabilities.
No security will be needed when issuing ordinary shares when compared to loans where assets should be kept as security
The company has the ability to attract large amounts of money as capital
The ordinary shares can be issued because there is a ready market for it.
Types of Ordinary Shares
Voting Ordinary Shares
These ordinary shareholders will have the right to vote. Therefore the voting ordinary shareholders will control the company. The major decisions such as appointment of the board of directors will be carried out by the ordinary shareholders to have the power.
Non Voting Ordinary Shares
Companies may issue non voting ordinary shares so that the control within the company will not be loss and these shareholders will take the same level of risk but they will not have the right to vote.
Differed Ordinary Shares
This is the special type of ordinary share issue by the company where the company will have a condition under which the differed ordinary shares will be paid a dividend only if the other ordinary shareholders are paid a dividend more than a specified amount.
Eg: A company to issue differed ordinary shares where the shareholders will be paid the dividend only if the ordinary shareholders are paid a dividend more than a specified dividend such as 50 p per share.
These ordinary shareholders will have the right to vote. Therefore the voting ordinary shareholders will control the company. The major decisions such as appointment of the board of directors will be carried out by the ordinary shareholders to have the power.
Non Voting Ordinary Shares
Companies may issue non voting ordinary shares so that the control within the company will not be loss and these shareholders will take the same level of risk but they will not have the right to vote.
Differed Ordinary Shares
This is the special type of ordinary share issue by the company where the company will have a condition under which the differed ordinary shares will be paid a dividend only if the other ordinary shareholders are paid a dividend more than a specified amount.
Eg: A company to issue differed ordinary shares where the shareholders will be paid the dividend only if the ordinary shareholders are paid a dividend more than a specified dividend such as 50 p per share.
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