Deciding on Share Classes for Your Singapore Company
Introduction
Rights such as a) control over the business’s operations, b) entitlement to the company’s profits (in the form of dividends), or c) preferential payout in case the business fails can be attached unequally to various “shares classes”. Your specific rights depend on the class of shares you own. This article will help you understand the classes of shares a Singapore company can issue and the rights each confers on shareholders in typical situations.
It covers the following topics:
Nature of Shares and Shareholders
A Singapore company’s capital is divided into small, equal units of a finite number. Each unit is known as a share. In simple terms, a share is a percentage of ownership in a company or a financial asset. If a company has a total of 100 shares issued then each share represents 1% of its ownership; whereas if a company has one hundred million shares issued then you would have to own one million shares in order to own 1% of the company. Individuals, corporate entities, or other organizations that own shares are known as “shareholders” and are the true owners of that company by law. All executives of the company as well as its board act on behalf of the shareholders. Shareholders have specific privileges and rights prescribed by the Companies Act in Singapore (or by the laws of the state where the company is incorporated). All shares issued by a Singapore company must comply with these prescriptions.
Typically, share ownership bestows the following basic rights to the shareholder:
- Participating in the distribution of company profits by receiving payments from the company; these payments are called dividends;
- Sharing the gain in the company's value through stock price appreciation;
- Managing company activities by voting on important issues, such as electing the board of directors, making amendments to the company’s constitution, issuing new shares, alterations of the share capital, etc;
- Having the right to buy any new shares offered to the public before they're offered to new shareholders;
- Receiving a proportional part of the value of the company's assets in the case of company’s liquidation.
- The right to inspect the records of the company.
- Right to sue the executives or directors in case of wrongful acts.
- The right to sell one’s shares to another person and transfer the rights.
However, usually not all shareholders are given the same set of rights. Generally, different sets of privileges are attached to different share classes and a shareholders rights depend on the share class of their shares.
Why Different Share Classes?
In a capitalist economy, all shareholders are not necessarily considered to be equal. Some may be the founders who created the business from a green field. Some could be early-stage investors (who took on more risk when the company was just getting started) while others could be late-stage investors (who undertook less risk because the company was on a stable footing by that time). Some may invest later, but at a time when the company could be facing a serious challenge, and hence they too could have undertaken higher risk. Some shareholders may be attractive to the company because they can provide benefits, such as advice, business relationships, technical knowhow, supplier networks, etc. As a result, companies want the ability to allocate different rights to shareholders depending on their characteristics. One way to do that is to bundle different sets of rights (voting rights, dividend-receiving rights, etc.) into special classes of shares.
When forming a Singapore company or thereafter, below are some of the key reasons you may decide to issue different share classes:
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- Often startup companies issue non-voting shares (i.e. shares that do not participate in the decision making of the company) as one class but assign disproportionately higher voting powers to another class of shares (e.g. each share could be worth 10 votes instead of just one) in order to ensure that the founder(s) retain management control. Facebook has done this to ensure that Mark Zuckerberg retains control over the company even though he is not the majority shareholder.
- Often companies come up with different classes of shares for different investment rounds (i.e. different timing of investments). For example, a company may go through Seed, Series A, Series B, and Series C funding, and consequently issue Ordinary, Class A, Class B, and Class C shares with corresponding sets of rights. These rights usually vary to favour earlier investors (e.g. a lower per share purchase price) in some aspects but later investors (e.g. more senior liquidation preference) in some other aspects.
- Singapore companies can also vary the dividend due to various shareholders by issuing share classes that differ in their dividend rights. For instance, a specific shareholder class may receive dividends before other share classes are eligible. The other share classes receive what is left over, if anything.
- In case of winding up of the company, certain share classes may receive a return on capital, while others will be limited to what is left over or may be denied any return.
- Motivating and retaining employees by issuing special share classes that have rights suitable for employees as opposed to investors.
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Fortunately, Singapore law is quite flexible towards the creation of share classes. Section 74 of the Singapore Companies Act stipulates that a company can issue different classes of shares with different shareholder rights attached to them in the manner prescribed in the company’s constitution. Therefore, each company is free to decide what share classes it needs and what shareholder rights it would like to assign to each class so long as it spells it out in its constitution. Moreover, the law does not specify what names must be given to such share classes. Thus, each company is free to name its share classes as it decides.
Some typical terms used to name the classes of shares, and the rights usually attached to them, are as follows:
1. Ordinary shares
This is the most common type of shares, and for most companies, ordinary shares constitute all shares of the company. In other words, most companies issue only one class of share i.e. ordinary shares. Each share represents an equal voting right. Usually, shareholders participate proportionally to their share in dividends and share in the surplus capital equally if the company is wound-up.
2. Preference shares
This class is usually represented by non-voting shares, although voting rights can also be attached to them. These shares usually have preferential rights over ordinary shares regarding distribution of profits (e.g. the amount of dividend entitlement) or at the final distribution if the company is wound up.
3. Non-voting shares
These shares do not entitle shareholders to attend general shareholder meetings or to vote on any company matters at these meetings.
4. Redeemable shares
This share class is issued and can be bought back by the company at a fixed date or at the option of the company. In such cases, shareholders have a right to receive repayment of their capital at a pre-specified rate of return.
5. Management shares
This share class grants extra voting rights and is typically allotted to the founders of the company, allowing them to retain control of the company, its original vision, and course of action.
6. Deferred ordinary shares
This class represents shares on which no dividend is paid until other classes have received a minimum payment of dividend. In other words, this class stands at the end of the line and receives only that which is left over, if anything.
7. “Alphabet shares”
Certain companies decide to create different classes of shares and to name them in alphabetical order (commonly “Class A”, “Class B”, “Class C”, and so forth) with each offering different rights and privileges to owners.
Ford Motor Company has spun-off to Class A ("Common Stock”) and Class B shares. Class A shares are owned by the investing public, and Class B belong only to the Ford family. Both classes share equally in dividends. However, Class B shareholders have more management power and the opportunity to receive a larger proportion of distributions in case of company liquidation than do Class A shareholders.
Alphabet, Google's parent company, has three share classes, all of which are entitled to dividends distribution but have have certain differences:
- GOOGL or Class A shares, also known as common stock, have the typical one-share-one-vote structure;
- Class B shares, which are held by founders and insiders, are granted 10 votes per share. These shares cannot be publicly traded;
- Owners of GOOG shares or Class C shares have no voting rights.
Berkshire Hathaway has Class A and Class B shares. The most important differences between the two types of stock are the following:
- The Class A stock price is designed to be approximately 1500 times that of Class B stock. Buffett created the cheaper Class B in 1996 to give investors an opportunity to buy stock in the company at a lower price;
- Class A stock has more voting rights;
- Class A shares can be converted into class B, but not the other way around.
Deciding the Share Classes for Your Singapore Company
Multiple share classes are more common for public companies, but a private company can do so as well. This is usually done to attract new investors, and to accommodate the needs of various stakeholders. At the time a company is incorporated, specific provisions in the Company Constitution can be added to achieve this flexibility. Alternatively, the constitution can be changed at a later date (i.e. only when the need arises), by adopting appropriate shareholders' resolution.
However, if you decide to issue different classes of shares, you should consider the following practical considerations:
- When an existing company issues a new class of shares, the rights and obligations of each class of shareholders (including existing shareholders) should be made as clear as possible, to prevent any misunderstandings and disputes arising out of the variation to the company constitution. You should keep in mind that under section 74 of Singapore Companies Act, mere 5 percent of shareholders can challenge such a variation in court, even if they themselves had previously voted in favour of the very variation. Thus, ensuring that all stakeholders are on the same page is essential.
- Company owners should also be aware of section 240 of the Securities and Futures Act (SFA). It stipulates that “offers of securities” (which covers shares) must be accompanied by a prospectus. Prospectus and offer documents are comprehensive documents commonly issued to investors in initial public offerings; their preparation is often lengthy and expensive. To avoid this requirement, companies usually rely on the private placement exemption. To avail this exemption, a series of conditions must 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 consecutive months. Violations of the SFA can result in personal criminal liability for company directors, so this is an important decision for which appropriate legal advice should be obtained.
- It is often best to iron out the details of the dividend, voting, and other rights of the various classes of shareholders not only in the company constitution and a shareholder resolution, but, preferably, through a shareholder agreement as well.
These are complex decisions that can have a lasting impact on the success of your company. Therefore, you should make them with proper thought and consideration; you should consult appropriate experts who understand your needs and recommend a share allocation structure that is suitable for those needs. If your Singapore company is considering the issue of different classes of shares, whether at the point of incorporation or later, please contact our Singapore corporate services team, who will be glad to help you with this as well any other incorporation, compliance, and accounting needs.
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