Shares and Shareholdings Explained

by | Oct 6, 2023 | Blog, FAQ, YBL Blogs

Shares and shareholdings are fundamental concepts in finance and business.

Forming the basis of ownership and investment in companies, shares allow individuals and entities to participate in a company’s success. In this article, we’ll look at the essentials of shares and shareholdings, including common types and whether shareholders are indeed owners of the company.

What are common shareholdings?

Shares represent ownership in a company and are typically divided into equal units. A company offers these units to offered to investors as a way to raise capital and, in return, grant ownership rights and potential financial rewards. Shares come in various forms – including common ordinary shares and preferred shares, each with its own set of rights and characteristics.

Common shares

Common shares, also known as ordinary shares, are the most typical type of shares issued by companies. When you hold common shares, you become a common shareholder. Common shareholders have several key rights and responsibilities:

  1. Limited liability: Common shareholders enjoy limited liability. This means their personal assets are generally protected from the company’s debts and legal obligations. Their financial liability is typically limited to the amount invested in the shares.
  2. Ownership stake: Common shareholders have an ownership stake in the company relevant to the number of common shares they hold. This stake grants them the right to vote on important company decisions, such as electing the board of directors.
  3. Dividend entitlement: Common shareholders are eligible to receive dividends, which are a portion of the company’s profits distributed to shareholders. However, the payment of dividends is not guaranteed and depends on the company’s financial performance and dividend policy.
  4. Residual claims: In the event of liquidation or winding up of the company, common shareholders have a residual claim on the company’s assets. This means that they are entitled to the remaining assets after the payment of debts and preferred share dividends.

Preferred shareholdings

Preferred shares are another type of share and different from common shares.

Preferred shareholders have different rights compared to common shareholders. They often receive fixed dividend payments, have higher priority in receiving assets in case of liquidation, and may not have voting rights or have limited voting rights.

Are shareholders owners of the company?

The concept of ownership in a company can be nuanced, and it depends on how you define ownership.

Shareholders do hold a form of ownership, but it is not the same as owning physical assets or direct control over the company’s operations. The control over day-to-day operations is limited, and depends on the number of shares held and the company’s corporate governance structure.

Because shareholders do not manage the company directly and elect a board of directors, it’s the board that make strategic decisions on behalf of shareholders. Moreover, shareholders can buy and sell their shares in the secondary market, making it easy to exchange ownership interests without disrupting the company’s operations.

The importance of a shareholder agreement

A shareholder agreement is a legally binding contract among the shareholders of a company. This agreement outlines the rights, responsibilities, and obligations of each shareholder and often addresses key issues related to corporate governance and decision-making.

These agreements are crucial for maintaining clear and harmonious relationships among shareholders and ensuring the smooth operation of the company. Shareholder agreements should be carefully drafted with the advice of a legal professional to align with the specific needs and goals of the company and its shareholders.

Wrapping up

Shares and shareholdings are essential components of the corporate world.

Common shareholdings come with specific rights and responsibilities, while preferred shareholdings offer different characteristics. While shareholders do have a form of ownership in the company, it is important to understand that ownership in the corporate context differs from traditional forms of ownership, emphasising financial interest and influence over strategic decisions rather than direct control.

If you need some advice on shares, shareholdings, or shareholder agreements, I’m here to help.

 

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