- How many classes of share can a Hong Kong company have?
- How to compare a class of share with another?
- Why bother to develop different classes of share?
- Can you tell me some classes of share commonly seen?
- Ordinary shares
- Preferred shares
- Non-voting ordinary shares
- Deferred ordinary shares
- Cumulative preferred shares
How many classes of share can a Hong Kong company have?
Most Hong Kong private limited companies (Note: we can help anyone from anywhere to incorporate, find our Hong Kong incorporation services here and there) only ever have one type (or, class) of share. Meanwhile, some companies choose to have two or more different class of share.
Per the Hong Kong company laws, the Company Ordinance (“CO”) allows Hong Kong companies to create, define and name their classes freely. The CO only requires that the companies must state the rule of their classes of share in their internal constitution, namely the Article of Association (“AA”), from the beginning of company registration. The AA should also state the rights and benefits that go with different classes.
The companies can amend their AA on their share matters when all the shareholders agree to whatever changes by passing resolutions in meetings, and notify the Companies Registry (“CR”) afterwards. So, Hong Kong companies are flexible enough to cope with as many as different shareholding structures and the needs of various shareholders.
Answer the question: a company can have unlimited classes of share, and define the degree of power, benefit, and responsibility that goes with each class. The company need all shareholders’ consent to the arrangements and updates the CR accordingly.
However, this flexibility may be confusing, especially to the people outside of the company. For example, a class of share named as “A Share” of Company A may be totally different from the “A Share” of Company B, even though their names are identical.
Fortunately, all AA of Hong Kong companies is available to the public. Thus anyone can know the definition of all classes of a Hong Kong company.
How to compare a class of share with another?
In the purest form, a Hong Kong company can exist with only one class of share, which should be commonly called ordinary shares. The shareholder of each ordinary share is entitled to one vote in any circumstances. In the event of dividends distribution from the company and participation in winding-up, each share has an equal level of rights to dividends and collection of the remaining value. In other words, the more ordinary share you have, the greater the control and interest you have of the company on an explicit scale.
On the other hand, if a company has more than one classes of share, the direction of control and interest distribution among shareholders become flexible or complicated.
In general, the shareholders design various classes of share by balancing the following aspect:
Entitlement to dividends
The share has the right to dividends or no dividends at all. If it entitles to dividends, it may happen only in certain circumstances. For example, the share has the right to preferential dividends, so the shareholder has the right to be paid a dividend before that of other classes of share, or right to get paid at a fixed level.
Entitlement to assets on winding up
When a company is dissolved (i.e. permanent closure), any company’s assets left after the company’s debts are paid can be distributed to shareholders. Different classes of share may have different priority to the distribution of the remaining asset. Shares with the highest-ranking are paid firstly, then the lower rank shares. However, the dissolved company always has insufficient assets to pay all shareholders, the second rank shares usually have no payment.
In the most straightforward classification, a class of share is either carrying voting rights or not. However, the shareholders prefer more specific scheme to spread the company’s control clearly while preserving effective management. A growing number of companies are adopting a weighted or tiered voting rights scheme. For example, shares may carry extra voting rights in certain circumstances or on certain vital matters affecting the company. The right to vote usually go with the right to attend the company’s general meeting. For example, shareholders of non-voting shares are usually not allowed to take part in the general meeting.
Why bother to develop different classes of share?
Generally, a company wants to have different share classes fall into one of the reasons below:
- attracting new investment per the needs of potential shareholders
- distributing dividend income in a particular direction
- removing (or empowering) voting powers of specific shareholders
- motivating employees through the issuance of non-voting shares
Can you tell me some classes of share commonly seen?
Remember that only the AA of a company has the precise rights attaching to each class. If you need to know the company, the only way is to read the AA.
But we are too busy to read, aren’t we? Here are some classes of share with their conventional naming and generalised definitions. Be reminded again, a company can name their share’s classes whatever its shareholders like. It would be best if you did not assume a share of a class of this company is the same as a share having the identical class name of that company.
The ordinary share is the purest class of share because it carries no exclusive rights or restrictions. One share equals one vote, and one dividend.
It is also called preference shares. The preferred shares have a right to receive a fixed amount (or, a fixed rate) of dividend every year and have priority over ordinary shares. On winding-up, preference shares are generally entitled to any capital ahead of ordinary shares.
Preference shares are usually non-voting.
Non-voting ordinary shares
Non-voting ordinary shares have the same rights as ordinary shares except its restriction of voting rights. They may carry voting rights if specific conditions are met, or carry no voting rights at all.
Deferred ordinary shares
It has equal voting rights as ordinary shares. However, the shareholders of this class of share will not be paid the dividend until people of other classes have received their minimum dividend. On winding-up, they will be the least priority to collect the remaining.
Cumulative preferred shares
If the dividend is missed or not fully paid in a year, the shortfall of the previous dividend will be made when the company has sufficient distributable capital.
On the contrary, a company can issue non-cumulative preferred shares. However, preferred shares are usually cumulative for a better return to the shareholders.
Most Hong Kong private companies start by having one type of shares in the form of an ordinary share class. When circumstances suggest needs for flexibility in voting rights and entitlement of dividends among the shareholders, the creation of new classes of share is feasible to outweigh the workload of the company AA’s modification.
So as a company may issue shares in multiple share classes, a shareholder can hold more than one class of share in the same company. Therefore, the shareholder can be benefiting from the different rights that each class offers and the company can be saved from designing a specific class of share for a particular shareholder.