Not All Shares are Created Equal
R Jooste and J Yeats in the second edition of Contemporary Company Law states that a company has “almost unlimited freedom to create the capital structure it desires and in so doing to structure the rights of each of its various classes of shares in an almost infinite variety of ways”. This ability of a company to structure its interests and corporate structures plays a crucial part of its success as it allows conglomerates to, inter alia, limit liability, avoid harsh tax legislation, improve their broad-based black economic empowerment score and allows for ease of doing business on an international scale. The most well-known classes of shares are ordinary, preference, redeemable and deferred shares. While the differences between these shares have been analysed extensively, the ability of a company to create various classes of ordinary shares has been left by the wayside.
At common law, the doctrine of equality between shares meant that shareholders of the same class of shares should be treated equally. That being said, section 36 of the Companies Act allows a company to create different classes of shares which have different preferences, rights and limitations. In the event that a company only has one class of shares, each of those shares have the right to be voted on every matter that may be decided by the shareholders of the company and the holders of that class are entitled to receive the net assets of the company upon its liquidation.
In light of the aforementioned, it is thus clear that a company can create any number of classes of different shares with different rights. For example, a company could designate the following classes of shares with the corresponding rights:
- Class A shares – this class has the right to participate in, speak at and vote on any matter at any meeting of the shareholders except for the appointment of directors;
- Class B shares – this class of shares’ right to participate in, speak at and vote on any matter at any meeting of the shareholders is limited to the appointment of directors;
- Class C shares – this class of shares’ right to participate in, speak at and vote on any matter at any meeting of the shareholders is limited to the distribution of profits to shareholders of Class A shares; and
- Class D shares – has no right to vote at any shareholders meeting, however they may attend such meetings and the shareholders of this class of shares shall share in the company’s residual value upon dissolution.
From the abovementioned, it is clear that a company may create different classes of shares, each having its own unique preferences, rights and limitations and may determine that the rights associated with a class of shares may vary in response to any objectively ascertainable fact. The ability to customise a memorandum of incorporation of a company to this extent gives a company almost uninhabited autonomy to structure its affairs and shareholding.