A limited company can have many classes of shares. These can be ordinary shares, preference shares and redeemable shares. The articles of association usually set out the rights of these shares while allowing the directors to issue shares with such rights and restrictions as determined by ordinary resolution.
Preference shares contain preferred rights in the company. This is commonly a right in relation to receiving company dividends ahead of other shareholders but it can also be the return of capital. Companies issue preference shares because they are attractive to the buyer while being a suitable means of raising investment.
If a company is considering a preference shares issue, it needs to review its articles of association to discover the feasibility of such an issue. Often, a company’s articles will need amending for the preference share issue to take place. This will require directors and shareholder resolutions to amend the articles.
Issuing preference shares needs a lot of careful consideration, especially the impact the issue with have on the company. Indeed, many companies issue preference shares which are convertible into ordinary shares depending on terms agreed with the investors. This can negate a big impact on the business but can also make the preference shares less attractive to investors.
Another issue is that pre-emption rights may need to be waived or varied so that the preference shares can be issued. Pre-emption exists where new shares must be offered to existing shareholders before they are offered externally.
This guide was written for ByteStart by Elemental Cosec, a company secretarial services firm who can advise and guide a company through a preferential share issue.
This article is provided for information purposes only and is of a general nature. Specific advice should always be obtained if you are in any doubt as to your legal responsibilities and no liability is accepted with respect to this article.
Last updated - 7th September, 2018