A share is an ownership interest in a limited liability company. When you own a share you are, to an extent also a partner in that company. When a corporation is formed, the founders (also called founding members) pay in the share capital. The share capital divided by the selected number of shares becomes a share’s par value (also called the nominal value). All shares of a company have the same par value, however, all shares need not otherwise confer the same rights. A share is essentially a right to the company’s assets after all debts have been paid. The shares are collected in a share register.
A share’s meaning
Holders of a share have a limited liability for the company’s business. The company’s Board of Directors is responsible for the company’s management. With their investment, shareholders in principle only risk losing the amount of the nominal value of their shares. Through their ownership stake in the Company, shareholders are entitled to attend and vote at the general meeting and receive part of the company’s share dividend. This, however, can be different if shares have been issued without voting rights or without profit rights. The general meeting appoints and dismisses the Board and decides how the profits will be distributed, these are the two most powerful tools of a shareholder to influence the company’s profitability and future. The number of shares in a company can be changed through a share issue of any kind or by splitting the shares.
Shares and different share classes
A company may issue different types of shares. The most common are known as “ordinary shares”, giving equal rights to all holders of such shares. Next to ordinary shares, letter shares can be issued (for instance the distinction between A and B shares). The articles of association or a shareholders agreement can contain provisions on – for instance – the right for holders of an A share to select a director A and the right for holders of a B share to select a director B, which directors subsequently have the joint authority to represent the company. The letter shares are mainly used to divide the power on representation and to provide the holder of one letter share slightly different powers compared to the holder of the other letter share. The reason a company offers shares of different types may be that the original shareholders would like to retain power in the company but still spread ownership to more people for example in order to bring in risk capital.
Most shares in private limited companies are ordinary shares. By contrast, preferred shares and priority shares give an advantage over ordinary shares. The advantage could consist of priority for share dividends or priority for dividends in bankruptcy as regard the preferred shares, and voting power in a general meeting of priority shares as regards the priority shares, providing such general meeting of priority shares the power to vote exclusively on certain issues stated in the articles of association. Priority shares usually have a lower right to the profit as these are used maintly for the heavy voting power.
For a listed company the value of a share is set every day through the trading done on an exchange or marketplace. It is significantly more difficult to put a price on an unlisted company’s shares. Typically the value of a non-listed companies’ shares is set through negotiation between the existing owners and buyers, where the starting point is that either party has carried out a valuation of the company. A shareholder in an unlisted limited liability company may recoup in two ways, either through the company paying dividends or someone acquiring the shares.