Did You Know You Can Issue Other Types Of Shares To Help Raise Funding For Your Business?
If your company has a standard Memorandum of Incorporation (MOI), there are a number of ordinary shares authorised for issue and it is limited to what the MOI states. This means that to obtain funding through capital issue, more shares need to be issued by the company. If there isn’t enough authorised share capital, then the MOI needs to be amended to increase the authorised share capital.
So with a standard MOI you only have the option to issue more normal ordinary share capital.
But you can change your MOI to allow for different classes of preference shares.
What are preference shares?
Preference shares are shares that pay a fixed portion of the shares nominal value to the shareholder before the normal ordinary shareholders. The preference shareholders also have a right to receive their pay-out when the company is wound up, so before the ordinary shareholders.
Because the investment return is fixed (almost like interest repayments on loans and debt), it is very lucrative for potential investors. It also means less risk for the potential investor.
For the company issuing the preference shares, it means that preference share dividends get paid out of after tax profits so the company does not get any tax deductions or tax benefit. The only reason preference shares will be used is to not dilute the shareholding and not obtain additional financing.
There are 4 different types of preference shares:
1) Cumulative – If dividends are not paid out, it accumulates to the next year, until the company can pay it. (remember a solvency test is still applicable)
2) Non-cumulative – If the company can’t pay dividends because of solvency requirements etc. then the dividend does not accumulate and the dividend payment is “lost” and will never be paid.
3) Participating – the holder of the preference shares not only gets a dividend, but could also get additional pay-outs i.e. % of profits etc. This needs to be pre-determined and put into the MOI
4) Convertible – The preference shares can be converted into a certain number of ordinary shares at a certain event. This needs to be pre-determined and put into the MOI
Why use preference shares?
If you would like to obtain funding for your business, but do not want to dilute ordinary shareholding, you could do this by changing your MOI to include authorised preference share.
The best thing to do is to consult your accountant or lawyer and let them advise you on the best possible way to structure your MOI.
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