Issuing Different Classes of Shares in Singapore
Many Small and Medium Enterprises (SMEs) are incorporated as private companies limited by shares. If you are the owner of an SME, did you know that you can issue shares in different classes? This can be a good way to raise capital through equity while retaining closer control over your company, or ensuring different members of the company can balance their interests in a way that facilitates streamlined management of the company.
What are Shares and Classes of Shares?
Most businesses are incorporated as companies limited by shares, which means that each owner (or investor) owns a certain percentage of the company expressed as a number of shares. Unlike a sole proprietorship or a partnership, the owners of a company and the company itself are separate legal persons and, theoretically, potential losses to the owners are limited to the value of their shares.
If a company only issues ordinary shares, then the default position is that all shareholders would have equal voting and dividend rights in proportion to the value of their shareholding, although ordinary shares can also be divided into classes (e.g. Class A Ordinary Shares and Class B Ordinary Shares) which may have different rights.
Can I Issue Different Classes of Shares?
Under the Companies Act (CA), a company may issue different classes of shares where this power is made available in its constitution. Each class of shares can have different shareholder rights attaching to them. A company may wish to confer some shareholders with preferential dividend rights in return for giving up voting rights, as is often the case for preference shares.
However, there are many ways to vary the voting and dividend rights attaching to different classes of shares. Certain shares may be given no voting rights, double voting rights, or even higher differential voting rights of 5, 10, or even 100 votes to 1 share.
Other bespoke rights can come into play too, such as rights of redemption (e.g. to sell their shares back to the company) or management rights (e.g. the right to appoint a board member). These can and should be varied to meet the particular needs of each company.
Why Issue Different Classes of Shares?
Using various permutations of these rights, the founder of a company can maintain substantial control over the company even where he only owns a minority of the shares in the company even after he has sold some shares to external investors.
However, one right that shareholders are entitled to and which cannot be derogated from is the right to attend general meetings of the company and to speak prior to the passing of any resolution taken at that meeting, being resolutions to voluntarily wind up the company, or resolutions to vary the rights attached to the share held by that particular shareholder.
There are several common classes of shares. Apart from “alphabet shares” (e.g. Class A Ordinary Shares), there are some commonly-used share classes like management shares with enhanced voting rights. Although such terms are commonly used, they are not legally defined and so a customised definition with an appropriate bundle of rights and obligations can and should be specified in the company’s constitution.
Management Shares and the Voting Rights of Shareholders
Under the CA, although the management of a company is entrusted with the directors, the directors may not effect certain actions without shareholder approval. Shareholder approval is usually premised on a majority of votes, but certain decisions require a special resolution (i.e. 75% of votes).
Actions requiring shareholder approval include:
- Making amendments to the company’s constitution
- Disposals of substantially the whole of the company’s business
- Issuing new shares
- Alterations of the share capital (e.g. capital reduction)
- Making payments to directors for loss of office
- Improving director emoluments
- Voluntarily winding up the company
These safeguards are meant to ensure that directors do not take advantage of their managerial positions at the expense of shareholders. Additional shareholder approval requirements may also be stipulated in each company’s constitution.
The downside to these protections is that the directors may have less flexibility to manoeuvre – for instance, a company facing cash flow problems will need to obtain shareholder approval before it can issue shares to raise funds. When the founder has shares with multiple votes, it may hence be easier to pass resolutions without the founder actually owning a majority of the shares.
How Do I Issue different Classes of Shares?
When issuing different classes of shares, there are practical considerations that a company should bear in mind.
For example, when issuing a new class of shares of an existing company, the rights and obligations of each class of shareholders should be made as clear as possible to prevent any misunderstandings or unhappiness. If you wish to vary the rights of shareholders, owners of SMEs should note that minority shareholders can challenge such a variation in court in certain circumstances, even if they themselves voted in favour of the variation. Thus, ensuring that all members of the company are on the same page is essential.
Company owners should also note section 240 of the Securities and Futures Act (SFA). The SFA stipulates that “offers of securities” (which includes ordinary shares and preference shares) must be accompanied by a prospectus. Prospectuses (and offer documents) are comprehensive documents commonly issued to investors in initial public offerings, and the preparation process is often lengthy and expensive.
In order to avoid the prospectus requirement, issuers of preference shares usually rely on the private placement exemption under the SFA. This exemption requires a series of conditions to be met, the most important of which is that the “offer of securities” must be made to no more than 50 persons within any period of 12 months. Breaching the requirements of the SFA can even result in personal criminal liability for company directors, so this is an important consideration upon which legal advice is often sought.
If your company wishes to issue different classes of shares, whether at the point of incorporation or later on, you will have to iron out the details of the different dividend, voting and other rights of the different classes of shareholders. This will have to be properly reflected in the company constitution, and, preferably, in a shareholder agreement too. Doing all of this can be a complex process, so it is advisable to consult a lawyer. Those seeking advice from corporate lawyers could consider our panel of corporate lawyers.