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If you are a first-time entrepreneur setting up your company in Singapore, it may be worthwhile for you to know about the nature of shares, different share classes and the rights that each type of share class holds.
In a nutshell, shares represent ownership in a company. When a company is created, the founders of the company must determine who owns the company. Often the founders also become the first shareholders of the company. The first, and most important, step in establishing a Singapore company, is to determine who owns how many shares. This is usually expressed as a percentage of the total number of shares and it is this percentage that is very important to each founder.
The most popular definition of a company’s share was originally voiced by the honourable judge in the English High Court of Borland’s Trustee v Steel Brothers & Co Ltd : “A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with… the Companies Act.”
Essentially, the definition characterises shares as a bundle of rights and obligations that are given to the shareholder in return for investing in the company. The shareholder does not have a legal or beneficial interest in the company’s property, since a fundamental principle of company law is that the company is a separate legal entity. Instead, the shareholders, by virtue of their ownership of the shares, are entitled to participate according to the terms of the company’s constitutional documents as long as the company is a going concern, and they are entitled to participate in the assets of the company if and when the company winds up.
Shareholders can be issued with shares at any point, whether at the time of incorporation or subsequently as the company grows, and their ownership of the shares is evinced by share certificates that are issued to them.
Shares, being a bundle of rights and obligations, may confer varying rights to different shareholders. In general, most companies would issue only one type of shares, known as ordinary shares. That said, the Singapore company law is flexible and allows for the creation of different types of shares, so that the respective shareholders are given varying rights to the company (commonly referred to as “classes of shares”). The main rights attached to shares are:
Although share classes are more common in public limited companies, it is not uncommon for private limited companies to issue shares of different classes, especially as it flourishes, in order to accommodate the needs of various stakeholders. For instance, a private limited company may wish to vary the dividends payable to the different shareholders, to create non-voting shares for family members, or redeemable preference shares for employees.
As the law in Singapore is flexible when it comes to the creation of share classes, there are no special restrictions on issuing shares with different rights. Share classes can be referred to by any name – such as “preference shares” with no voting rights, “management shares” with extra voting rights, and “alphabet shares” such as A-shares and B-shares. These share classes do not have any legal definition, so their associated rights would need to be defined in the Constitution, or in the Resolution that creates the particular class of shares.
Some typical classes of shares, and their attached rights, are:
Although most small startups tend to give its shareholders an equal bundle of rights per share, there is great freedom and flexibility for the founders and investors to be bestowed with varying degrees of management control and varying degrees of entitlement to the company’s profits or capital. Investment-seeking companies and even startups that are not raising outside money at the outset may find it worthwhile to establish an equity framework that would accommodate investment at a later time and communicates a degree of sophistication on the part of the founders.
Singapore law continues to inspire a welcoming jurisdiction for the establishment and growth of businesses, by offering this flexibility to capture the desires of different types of investors – who may or may not need greater control in the management of the company, or, who may or may not need the assurance of a fixed return on their investment in the company. Anyone who contemplates the creation of multiple share classes should consider the motive for the different classes and fully evaluate the rights afforded to each class.
Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Hawksford, our services and related matters. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.
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