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In today’s Commerce class, We will continue learning about Limited Liabilities Companies from where we stopped our last lesson. We hope you enjoy the class!
- Shares – Definition classes; features
- How shares are sold or issued
- Methods of listing shares at the Stock Exchange
- Rights of shareholders
A share is a fixed unit of capital invested in a business by the members of a company. It represents the individual portion of the company’s capital owned by the shareholders.
Shares represent ownership since by buying shares, the buyer becomes one of the owners of the company concerned and is entitled to share in the profits of the company. Such a reward from profit to the shareholder is called “Dividend”.
CLASSES OF SHARES
Shares may be divided into the following classes
- Preference shares
- Ordinary Shares
- Deferred or founders shares
A. PREFERENCE SHARES
- They have a fixed rate of dividend
- Owners receive dividend first before all other classes of shares.
- The holders are also entitled to return of capital first at winding up
- Holders have no voting rights
TYPES OF PREFERENCE SHARES
- CUMULATIVE PREFERENCE SHARES: If preference shares are cumulative, it means dividends which are not paid in any year is carried forward and must be paid in any subsequent years before any dividend are paid on the ordinary or deferred shares
- Fixed-rate of dividends
- They have priority in the share of dividends over all other classes of shares
- They receive arrears of dividends not paid before other classes of shares get dividends
- NON CUMULATIVE PREFERENCE SHARES: The dividends on this class of shares does not accumulate from one year to another. If the company fails to pay dividends in a particular year, there is no right to payment of the arrears in later years i.e. the unpaid dividends will not be carried forward.
N.B In the absence of clear indications to the contrary, however, preference shares are presumed to be cumulative
- PARTICIPATING PREFERENCE SHARES: These are preference shares the holders of which have the right to share with ordinary shareholders in the surplus profits after both the preference and ordinary shareholders have received their dividends.
- Fixed-rate of dividends
- They received their dividends first before the ordinary shares
- They are entitled to participate in further dividends after all other classes of shares have received specified percentage of the profits
- Redeemable Preference Shares: These have prior claims before all other preference shares. They have the disadvantage to the shareholder of being bought back by the company after some time. This type of shares is issued to finance particular projects to be repaid when the project is completed. The companies use their profits or out of proceeds of further issue of shares to buy back these shares. The redemption of this type of shares is not regarded as amounting to a reduction of Capital.
B. Ordinary Shares
- This type of shares are also known as “equities” as they rank equally
- Holders are the risk bearers and also the real owners of limited liability companies
- They receive dividends only after other fixed-rate shareholders have been paid
- Holders of ordinary shares can vote and be voted for at general meetings.
- Ordinary shares are not redeemable
- They have no fixed rate of dividend – i.e. the rate of dividend for ordinary shareholders fluctuates
- Ordinary shareholders rank last for payment on winding up the company
C. DEFERRED OR FOUNDERS SHARES
- They are usually issued to the founders or promoters of the company.
- They are no longer common in public limited companies.
- Holders have right to the remainder of the profit after preference shares and ordinary shares have received a stated amount.
- They are often issued as part payment to the owners of a company that have been bought up
- They carry special voting rights.
N.B. All terms/rights attached to each class/sub-class of shares are usually specified in the Articles of Association.
HOW SHARES ARE SOLD OR ISSUED
- Shares issued at Par: This means that persons applying for the shares are asked to pay the exact face or nominal value of the shares e.g. N1 ordinary shares issued at N1
- Shares Issued at a Premium: This means that persons applying for the shares are asked to pay more than the nominal or face value e.g. N1 ordinary shares issued at N1:40
- Shares Issued at a Discount: This means that persons applying for the shares are asked to pay less than their nominal or face value e.g. N1 ordinary shares issued at N0.70
OTHER TERMS ASSOCIATED WITH SHARES
- Bonus Shares: These are shares issued free of charge to existing shareholders in proportion to their present holdings made possible by a revaluation of assets or out of profits.
- Rights Issue: This is an offer of fresh shares made to existing shareholders on favourable terms as a means of raising additional capital. It involves the shareholders making fresh payments to the company
RAISING OF CAPITAL
The methods by which a Public Limited issue it shares (i.e. get its shares listed on the Stock Exchange are
- Offer for Subscription: by the company selling shares to the general public
- By offer for Sale: In this method, an issuing house will buy the shares in bulk from the company and subsequently offer them for sale to the public
- By Placing: Here the shares of the company are placed with institutional investors e.g. insurance companies, pension funds etc.
- By Introduction: If a private limited company attract the minimum required number of shareholders and also satisfy other listing conditions, it shares may be listed directly on the Stock Exchange if the company makes an application to that effect.
RIGHTS OF SHAREHOLDERS
- Right to vote at meetings
- Right to dividends – subject to declaration of dividends by the directors
- Right to receive notice of General Meetings
- Right to appoint proxy to represent him at meetings of shareholders
- Right to participate in the distribution of assets in the events of winding up.
- What is a“right issue” How does it differ from “bonus issue”?
- List four rights of shareholders of a limited liability company.
GENERAL EVALUATION/REVISION QUESTIONS
1 Outline five contents of the memorandum of association
2 State five differences between ordinary shares and preference shares
3 Give five reasons why a manufacturer may brand his products
4 State five advantages of packaging
5 Explain six facilities that a retail shop should have to encourage self-service
Essential Commerce for SSS by O. A. Longe Page 149 – 166
- State four ways by which the shares of a company can be listed on the Stock Exchange
- State three rights of the Shareholders
We have come to the end of this class. We do hope you enjoyed the class?
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
In our next class, we will be learning about Limited Liability Companies. We are very much eager to meet you there.
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