Sharing takes caring: Understanding your company shares
Corporate Law - 15 Dec 2020
Are you considering registering a company? Or perhaps thinking about becoming an investor? If so, it is essential that you understand what are shares and the various rights and obligations that attach to them.
What are shares?
In simple terms, a share is a portion of ownership in a company. When a business is seeking to raise funds via equity, it will often engage with investors who provide funds in return for a proportionate number of shares in the company. Investors who hold shares of a company are known as shareholders.
So, who has the power to make decisions?
Company directors maintain exclusive power to manage the business of the company. Shareholders cannot interfere with management decisions, except in rare circumstances where directors cannot make decisions, for example, due to deadlock or a conflict of interest.
Do shareholders get a say on anything?
The short answer? Yes, but only on important matters.
The Corporations Act 2001 (Cth) (Act) outlines the matters on which shareholders hold the ability to vote and make decisions about the company. For example, under the Act shareholders may vote on the removal and appointment of directors, changes to the company’s Constitution and approving related party transactions (amongst many other things!). However, many of these rules will be subject to any contradictory express provisions already stated within the company Constitution and any agreement between shareholders (called a ‘shareholders’ agreement’ – a contract between the shareholders about how the company will operate).
Okay, so they can vote… but how?
Upon a request from at least 5% of shareholders, directors are obliged call a shareholder meeting, provided the purpose for calling the meeting is a matter which they are permitted to vote on. Public companies are also required to hold a shareholder meeting each year (called an annual general meeting) which is a hallmark of good corporate governance by ensuring shareholders are kept informed and have a say about important matters relating to the company.
Most matters require a majority shareholder vote to pass (an ‘ordinary resolution’) – meaning that if a single shareholder held more than 50% of shares, they could pass a resolution alone. However, other important matters (for example, changes to the company’s Constitution) require a higher approval threshold (called a ‘special resolution’) with at least 75% of eligible votes to pass. That said, the voting power of each individual shareholder will also depend on what class of shares they own.
Wait – there are different types of shares?
Yes, there can be! Companies may issue different classes of shares, depending on their needs. The rights of different classes of shares are found in the company’s Constitution.
Preference shares are the highest class, generally carrying voting rights in addition to other preferential benefits (such as superior dividend rights and priority in capital distributions).
Ordinary shares are the most common and are ‘standard’ shares carrying voting rights. Although not obliged, a company may choose to distribute dividends to ordinary shareholders. Subordinate to preference shareholders, these also attract rights to distributions upon winding up.
Non-voting shares carry no right to vote or to attend meetings. Usually, they are issued to employees, so that remuneration can be paid as a dividend for the purposes of tax efficiency for both parties – called an ‘employee share scheme’. These can also be advantageous for start-ups when raising capital, ensuring there is no dilution of founding members’ control.
Whether you’re issuing shares, or investing in them, you should think carefully about how the company share structure may affect the business or your role in it. With proper mindfulness, the nature of the shareholding in a business has the potential to be a great driver of value and prosperity.
Co-written by Chelsea Fennell & Maddy Ransley.
If you enjoyed this blog, check out this one here to learn all about trusts.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.