- One vital component of company formation is shareholdings. This post is mostly material for companies limited by shares.
- Importantly, it is not enough to define who your shareholders are as a startup or company, having a robust understanding of the varying types of shares available to a company and her shareholders is also vital.
- Here, we would be highlighting these shareholding types and what they actually mean in this context.
Types of shareholdings
Under Nigeria’s CAMA 20, we have three major types of shares. The Ordinary, Preference and Deferred shareholdings and we would be looking at these in detail.
Ordinary shares
Just as the name implies, these shares don’t confer special rights and privileges on the holders. The shareholders under this category assume the bulk of the risk and liabilities of the firm but with the risk comes the big profits. This class of shareholders are entitled to dividends only after the preference shareholders have been settled.
Preference Shares
Preferred shareholders hold special rights and privileges with respect to company’s equity. In simpler words, a preferred shareholder is entitled to dividends usually fixed and where available before any other type of shareholder. This type of shares would appeal to investors who want an assuring investment yield with minimal risks.
Deferred Shares
- This may also be referred to as founders shares. Here, the shares are mostly subscribed to by the company promoters. Importantly, holders of these rights are able to take up a large chunk of the company profits. The articles may also spell out the special rights and privileges available to them.
- Other than the aforementioned, we also have a fourth share variant under S 147 of CAMA 20. This is called the redeemable preference shares. Under this category of shares, a company may provide in the articles that any preference shares issued to any shareholders is subject to redemption. In other words, these preference shares allotted to shareholders may be reclaimed by the company. This is however subject to the conditions provided in CAMA for the redemption of those shares.
- Conclusively, the equity implications involved with corporate shareholdings make it necessary for startups and companies to engage professionals in helping them understand the effect of these varying shares types.
- This is expedient because shares affect the financial stakes of a company, influence investment portfolios and have a colossal impact on the success of a startup at large.
References
- Companies and Allied Matters Act 2020 available at https://www.cac.gov.ng/wp-content/uploads/2020/12/CAMA-NOTE-BOOK-FULL-VERSION.pdf accessed on August 15 2023
- Investsmall, “What are the Types of Shares In Nigeria” available at https://www.investsmall.co/what-are-the-types-of-shares-in-nigeria/ accessed on August 15, 2023