The terms “shares” and “voting rights” are always seen in similar contexts, sometimes even used interchangeably; it would not be irrational to think that the two are equal or that a certain number of shares leads to the same amount of voting rights. However, it is important to understand the difference between the two, especially in the context of private companies, as share structures tend to be more complex and bespoke.
Shares
Shares are a unit of ownership within a company where shareholders hold proprietary interests in the company, and in a legal sense, hold proportionate ownership over it.
Voting Rights
Voting rights are usually attached to shares and entitle the shareholder to vote in general meetings of the company. They are derived from the shares themselves and defined by the rights attached to the particular class of shares.
It is important to note, however, that voting rights do not automatically mirror the proportion of share capital held by a shareholder. The proportion of voting rights can be determined by the company’s articles of association based on the class of shares held.
For example, a shareholder with 50% of the company’s share capital may hold more or less than 50% of the company’s voting rights, depending on the company’s share structure. Perhaps Class B shares in a company carry five voting rights per share, while Class A shares only hold one vote per share. This will result in a variation of voting power amongst shareholders, even if their interests are approximately the same. These are called alphabet shares and are common practice in private companies.
Non-Voting Shares
There may be situations where the company issues shares that do not carry any voting rights at all. These are common in structures where an investor or employee of the company wishes to receive dividends or capital appreciation of the company without taking part in its governance and management (for example, within shareholder meetings).
Reasons and Significance
Effective control of a private company is not determined simply by looking at the share capital alone, but rather the proportion of voting rights. A person who holds 40% of the share capital but only 10% of the voting rights cannot block a special resolution as the proportion of their voting rights are significantly lower than their shares. Therefore, shareholders must understand the nature of the class of shares they possess, and note the respective level of decision power they possess.
The PSC (Persons with Significant Control) Register also recognises this distinction. The five conditions of significant control distinguish shareholding and voting rights as two separate categories for eligibility. A person can qualify as a PSC if they either have more than 25% of shares or more than 25% of voting rights. This means that a person can qualify as a PSC of a company by virtue of their voting rights alone, even if they may hold only 10% of shares in the company. The independent assessment ensures that the definition of “significant control” is accounted for from different perspectives.
However, the flexibility offered by the ability to create different share classes is a powerful and efficient tool in structuring private companies. Here are a few examples where this is utilised:
- Founders of a company retain high voting power but a low percentage of share in order to make more shares available for purchase by new investors
- Family companies allot alphabet shares to distribute economic returns and dividends amongst family members, but to concentrate voting power in the hands of family members who are active in its management and operation
- Employee share schemes use non-voting shares to provide economic participation without the decision-making power
On the other hand, this signifies the need for clarity within the company’s articles in mapping out the exact nature and power conferred by different kinds of shares, such as dividend rights and voting rights. Ambiguity may give rise to shareholder disputes and the breakdown of commercial relationships.