Share classes affect everyone

COMPLICATED: FIRMS CAN HAVE MORE THAN ONE CLASS OF SHARES

Entrepreneurs may end up in court, fighting over shareholding issues with partners or investors, due to a lack of understanding.

We can all agree that the modernisation of society has done us a world of good. Advancements in technology, production and management processes have allowed for better products and services. But is it possible that at times we overthink things where simplicity and/or keeping with the old should be the status quo?

This question is personified in today’s company shareholding system and structures, which have become extremely complex and difficult to understand. The vast difference between the originally designed share system from today’s is almost incomparable.

A system that was designed to be as simple as allocating ownership rights at a percentage of the whole to an individual or organisation, based on their contribution of either capital, resources or skill, has been turned into a debacle that plays out at commercial courts across the world.

This is all because of disputes arising from claims against the numerous classes of shares that are available to pick from.

In the old days, if you owned a share you simply owned a piece of the company which entitled you to dividends and the increased value of the organisation.

Today it’s not so straightforward. The modernisation of today’s economy, that is driven by debt and the stock market, has affected this simple but vital function of business. Additionally, the industrialisation of the world economy opened international markets which allowed for cross-border ownership.

However, the different classes of shares are a slight overkill. According to Investopedia, a share class is a designation given to a specific type of share. Companies can have more than one class of shares, usually identifiable by alphabetic markers such as Class A or Class B shares; these carry different rights and privileges.

There are various types of categories of shares, such as ordinary, deferred ordinary, non-voting ordinary, redeemable, preference, cumulative preference, redeemable preference shares etc.

You might be thinking that all these share classes don’t affect you as a small business but to the contrary, share classes affect all registered private or publicly held companies.

The Companies Act of 2008 in 37(2) states: “Each issued share of a company, regardless of its class, has associated with it one general voting right, except to the extent provided otherwise by (a) this Act; or (b) the preferences, rights, limitations and other terms determined by or in terms of the company’s Memorandum of Incorporation in accordance with section 36.”

A lack of understanding is one of the reasons why entrepreneurs end up in court fighting over shareholding with their partners/investors. Understanding what your shares entitle you to and their limitations is important and to this effect we will dissect as succinctly as possible the intricacies of shareholding next week.

Munya Duvera is CEO at Duvera Elgroup