“SHARES” EXPLAINED

Dear Subscriber,

It is common to hear the word shares or share capital being used in the business sector especially relating to a Limited Liability Company (LLC) or a Public Limited Company (PLC). The word ‘Share’ is synonymous with ownership rights in a company and represents the limits of an individual or corporations rights in a business entity.

In Nigeria it is common for Entrepreneurs to reflect deeply on who to bring on board their Company knowing the implications of giving ownership rights. Our discussion today would be to demystify the meaning, types, rights of shareholders and inform you on how to manage shareholders in your Company.

Meaning

Investopedia defines Shares as units of ownership interest in a corporation (company) or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business’s day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends.

Common Types

There are various classes of shares that could be issued by a company including ordinary shares, preference shares, deferred shares and founders’ shares. What differentiates different types of shares is the kind of rights attached to them. Most common type is Ordinary shares which are the basic shares of a Company which have no special rights attached and which bear the main risk. Preference shares are those shares that have additional rights attached to them and they could take various forms. 

Classes of shares that are not so common in the Nigerian business space includes Cumulative preference shares, deferred shares, redeemable shares etc.

Rights and Liabilities of shareholders

A shareholder is entitled to vote in the proceedings of company meetings, receive dividend whenever dividend is declared, attend meetings and contribute to the affairs of the company, inspect company’s statutory books, protect proprietary interest in the management of the company.

On the other hand, a shareholder is liable to pay for shares held and unpaid for upon winding up of the company where the company is limited by shares. In the case of unlimited company, the shareholder is liable for the full debt of the company. A shareholder is also liable to forfeit shares upon failure to honour a call to pay up in respect of any unpaid shares and suffer any penalties stipulated in the articles of association or term of issue (e.g. case of the banks taken over by the CBN in the recent past)

Powers of Shareholders.

Those who take interests in shares of companies generally have to accept majority rule. However, there are several rights at law that the minority possess to protect their interests and ensure that they are treated fairly. Rights of shareholders include Right to vote on the election of directors, Right to amend memorandum and articles of the company, Right to vote on major corporate events such as mergers, liquidation etc.; Right to take action through a written consent; Right to call for and attend annual general meetings, Right to inspect books and records of the Company and Right to sue the Company or on behalf of the Company.

Managing your Shareholders (Tips for the Start-up)

It is advisable for every start-up with more than one stakeholder to have a Shareholders agreement that documents the running of the Company and the responsibilities of the shareholders. This document ensures that there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion. As a result, it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably.

The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters contained in this article please contact a professional.

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