What is an ordinary share?
An ordinary share, also called a common share, is one unit of equity ownership in a company, allowing its owner certain rights.
Generally, ordinary shares, also referred to as common stock, form the largest proportion of a company’s share capital. They represent one of the three typical share classes of a company, the other two being preference shares and deferred shares.
Refer to the article, ‘Preference Shares Explained’, for more information on preference shares and the article, ‘A General Overview of Company Shares in South Africa’, for more detail about company shares in general.
Authorisation, issue, and conversion of ordinary shares
The authorisation, issue, and conversion of a company’s shares, including ordinary shares, are regulated by the Companies Act (Act 71 of 2008) (hereafter referred to as the Act) and executed in terms of the Memorandum of Incorporation (MOI) of the company.
According to the Act, an authorised share of a company has no rights associated with it until it has been issued. In addition, a company is not allowed to issue shares of any class to itself.
Ordinary shares cannot be converted into preference shares. Convertible preference shares, however, can be converted into ordinary shares on certain terms.
Regulations regarding par value shares and no par value shares
Par value shares, including ordinary shares, are shares to which a standard nominal value (face value) is attached. Normally, the face value is a small amount, such as R1.
No par value shares are shares with no nominal value attached to them.
Contrary to the previous Companies Act of 1973, the current Companies Act of 2008 rules that no company share has a nominal or par value (section 35(2)). Hence, no company is allowed to authorise and issue ordinary shares under the current Companies Act, which came into effect on May 1, 2011, (the effective date).
To accommodate companies, with issued nominal par value ordinary shares, that existed before the effective date (referred to as pre-existing companies), the Act rules in section 35(6) that any shares of such a company, and held by a shareholder, continue to have the rights associated with them, including the nominal or par value assigned to them when issued, subject to any regulations enacted in this regard.
In order to provide for a smooth transition from the 1973 Act to the 2008 Act, the new Companies Act contains certain transitional arrangements, including the conversion of par value shares of pre-existing companies to shares with no par value (schedule 5 (item 6) and regulation 31 of the Companies Regulations 2011).
Basically, there are two scenarios provided for:
- Conversion of par value shares of a company that are not issued
A company is not allowed to issue any of the shares until they are converted from par value shares to no par value shares as regulated by the Act.
The board of directors of a company may execute the conversion by adopting a board resolution to do so and filing a notice of the resolution under the cover of the prescribed form with the Companies and Intellectual Property Commission (CIPC).
- Conversion of par value issued shares of a company
A pre-existing company with any outstanding issued shares of par value may issue further authorised shares of par value, up to the maximum number of shares authorised, or until it has published a proposal to convert the specific class of issued shares.
For example, when a company has already issued 700 par value ordinary shares of its 1 000 authorised ordinary shares, the Act makes provision for the outstanding 300 shares to be issued.
However, any new shares to be created by the company will have to be created at no par value.
An amendment to a pre-existing company’s MOI is required in order to execute a conversion of one or more classes of shares (regulation 31(6) of the Companies Regulations, 2011).
The amendment:
- May be proposed at any time by the company’s board of directors.
- Will have been adopted only if it is approved by a special resolution adopted by the shareholders of each such class of shares, and
- a further special resolution adopted by a meeting of the company’s shareholders called for that purpose.
A company is required to keep the resolutions and original documents in safe custody and to make them available on request
Features of ordinary shares
- Holders of ordinary shares are granted voting rights, enabling them to vote at annual general meetings (AGMs) and to elect the board of directors. However, voting rights attached to ordinary shares are usually in proportion to the number of shares owned by a shareholder.
- Dependent on their terms, ordinary shares usually have no date of maturity, continuing to exist perpetually unless the company is liquidated.
- If a company does not generate profits, is liquidated, or deregistered, the liability of an ordinary shareholder is limited to the amount paid for the shares.
- Ordinary shareholders have the right to receive dividends, should the company declare dividends. Dividends for ordinary shareholders can be higher than dividends for preference shareholders as dividends for ordinary shares are not fixed. Although, preference shareholders have preference above ordinary shareholders when dividends are declared.
- Ordinary shareholders are entitled to a share of the company’s residual value upon winding-up of the company. However, bondholders and preference shareholders share in the residual value before ordinary shareholders.
Types of ordinary shares
There are different types of ordinary shares, such as:
B-ordinary shares
B-ordinary shareholders have fewer or no voting rights than ordinary shareholders. In addition, they may not be entitled to share in the residual value of the company should it be liquidated.
B-ordinary shares are preferred by investors who are looking for a long-term investment.
N-ordinary shares
Contrary to ordinary shares, N-ordinary shares grant shareholders minimal or zero voting rights.
They often trade at a discount to ordinary shares, but N-ordinary shareholders receive the same dividend as ordinary shareholders.
Typically, N-ordinary shareholders are not concerned with voting rights but are more interested in dividend income.
Notes:
- Accentuations in citations from the Companies Act (Act 71 of 2008), also referred to as the Act, are by the article writer.
- This article does not intend to provide investment or trading advice. Its aim is solely informative.
