Contents
- What are Ordinary Shares?
- Regulatory Framework for Ordinary Shares
- Rights Attached to Ordinary Shares
- Limited Liability of Shareholders
- Responsibilities of Ordinary Shareholders
- Issuance and Trading of Ordinary Shares
- Ordinary Shareholder – Advantages
- Ordinary Shareholder – Disadvantages
What are Ordinary Shares?
Ordinary shares, often referred to as common stock, are units of equity ownership issued by a company primarily to its founders. These shares grant holders certain privileges over preference shares, particularly in corporate governance, such as voting rights on important company decisions.
However, in the financial hierarchy, ordinary shares are subordinate to preference shares. This means that in situations of company liquidation or when dividends are distributed, the claims of ordinary shareholders are addressed after those of preference shareholders are satisfied.
Moreover, ordinary shares can be issued either fully paid, where the shareholder has paid the full value of the shares at the time of purchase, or partly paid, where some portion of the share value remains unpaid, to be settled at a later date or upon specific conditions being met.
Regulatory Framework for Ordinary Shares
In Australia, the legal framework governing ordinary shares is primarily established under the Corporations Act 2001, which sets forth the regulations for company operations and securities management. This Act details the rights and obligations associated with ordinary shares, including issuance procedures, shareholder rights, and the specifics of dividend distributions.
Additional legal guidance is provided by the Australian Securities Exchange (ASX), which imposes its own set of listing rules that companies must comply with to maintain the trading of their shares on the exchange. These regulations ensure transparency, fairness, and efficiency in the trading and management of ordinary shares, helping to protect investors and maintain the integrity of the financial market.
Rights Attached to Ordinary Shares
Voting Rights and Their Influence on Corporate Decisions
In Australia, holders of ordinary shares typically have the right to vote at shareholder meetings. This fundamental right enables them to influence corporate governance and decision making processes, including the election of board members and the approval of major corporate actions such as mergers, acquisitions, and changes to the corporate charter. Voting typically occurs on a per share basis, granting shareholders a proportionate influence in line with their investment.
The Corporations Act 2001 ensures that these voting processes are conducted fairly and transparently, reinforcing the role of shareholders in steering the company’s strategic directions.
Dividend Rights and Profit Sharing
Ordinary shareholders in Australian companies are entitled to receive dividends declared by the company. These dividends are typically paid from the profits of the company and can be variable, depending on the company’s profitability and board decisions.
The Corporations Act 2001 stipulates that dividends can only be paid out of profits or otherwise legally available funds, and the company must satisfy a solvency test before making any dividend payments. This legal framework ensures that dividends are distributed responsibly without compromising the financial stability of the company.
Rights to New Shares and Other Entitlements
During periods of company expansion or restructuring, ordinary shareholders may have rights to new shares issued by the company, often referred to as pre emptive rights or rights issues. These rights allow existing shareholders to maintain their proportional ownership in the company by purchasing additional shares before they are offered to the public.
The Corporations Act 2001 provides regulations for how these rights must be managed, ensuring that all shareholders are given a fair opportunity to participate in new share offerings.
Additional Rights of Ordinary Shareholders
Beyond the primary rights of voting, dividends, and rights to new shares, ordinary shareholders in Australia also enjoy several other legal protections and entitlements:
- Right to access company information
- Right to attend and speak at meetings
- Right to participate in major decisions
- Right to appoint and remove Directors
These rights collectively empower ordinary shareholders to actively participate in the governance of their investments, ensuring that their interests are adequately represented and protected under Australian law.
Limited Liability of Shareholders
Limited liability is a fundamental principle that protects shareholders in a corporation. Under this principle, the financial liability of the shareholders is restricted to the amount they have invested in purchasing the shares of the company. This means that if the company incurs debt or faces legal claims, the personal assets of the shareholders are shielded from being used to satisfy company debts or liabilities.
In Australia, this protection is codified under the Corporations Act 2001, which establishes that shareholders are not personally responsible for the company’s obligations. Therefore, in the event of bankruptcy or liquidation, shareholders will lose only their investment in the shares and not be subjected to any further financial demands related to the company’s liabilities.
Responsibilities of Ordinary Shareholders
Shareholder Responsibilities in Company Governance
Ordinary shareholders have a vital role in the governance of a company through their participation in shareholder meetings and votes. While they are not involved in the day to day management, they are responsible for electing the board of directors who oversee the broader strategic direction of the company.
Shareholders must exercise their voting rights thoughtfully and informedly, taking into consideration the long term interests of the company and all its stakeholders. This involves being well informed about the company’s performance, its leadership, and strategic initiatives presented for shareholder approval.
Legal Obligations Concerning Trading and Transparency
Ordinary shareholders are bound by certain legal obligations regarding trading and transparency to maintain fair and orderly markets. Under the Corporations Act 2001 and regulations set by the Australian Securities and Investments Commission (ASIC), shareholders must avoid insider trading, which involves trading based on material non public information.
Furthermore, substantial shareholders, or those holding more than 5% of a company’s shares, are required to disclose their holdings and any changes to their position. This transparency is crucial for maintaining investor confidence and ensuring that all market participants can make decisions based on the same available information.
Issuance and Trading of Ordinary Shares
The issuance of ordinary shares in Australia can occur through public offerings or private placements. A public offering, often facilitated through an initial public offering (IPO), allows a company to raise capital from the general public by listing shares on a stock exchange such as the ASX.
This process requires rigorous disclosure and registration with ASIC, including the preparation of a prospectus that details the company’s financials, risks, and the terms of the share offering. Private placements involve selling shares to a select group of investors, typically institutional investors, without a public offering, which can be faster and less costly in terms of regulatory requirements.
Transferability of Shares
Ordinary shares are generally freely transferable, allowing shareholders to sell their shares on the open market unless restricted by the company’s constitution or a shareholder agreement. The ASX oversees the trading of shares and imposes rules to ensure an efficient, competitive, and informed market. For example, the ASX Listing Rules require companies to disclose information that could affect the price or value of their shares, thereby ensuring that all market participants have access to the same information. The ASX also monitors trading activities to prevent market manipulation and to protect the integrity of the market.
These responsibilities and processes underscore the critical role of ordinary shareholders and the regulatory framework that supports transparent and fair trading of shares in Australia’s financial markets.
Ordinary Shareholder – Advantages
Influence on Company Direction through Voting Rights
Ordinary shareholders have the significant advantage of influencing the strategic direction of a company through their voting rights. By participating in shareholder meetings and casting votes on crucial issues, they play a direct role in shaping corporate policies, electing board members, and making decisions on significant corporate actions. This active involvement allows them to help steer the company towards growth and operational success.
Access to Company Information and Financial Reports
Holding ordinary shares provides individuals with the right to access key company documents, including annual financial reports and other disclosures. This transparency allows shareholders to monitor the company’s performance, assess its financial health, and make informed decisions regarding their investment. Such access is especially valuable for those who are keenly interested in the company’s operations and wish to stay informed about its progress and prospects.
Potential for Higher Returns on Investment
Ordinary shareholders stand to benefit from potentially higher dividends when the company performs well financially. Unlike preferred shareholders, who receive a fixed dividend, the dividends for ordinary shares are typically variable and can increase with the company‘s profitability. This aspect of ordinary shares holds the promise of unlimited upside potential, allowing shareholders to benefit proportionally from the company‘s success.
Advantages in Corporate Acquisitions
In the event of a corporate buyout or acquisition, ordinary shareholders may receive a more favourable outcome compared to preferred shareholders. Since their dividends are not capped, any premium paid during the acquisition could result in a larger payout to ordinary shareholders, reflecting their proportional stake in the company‘s increased valuation.
These advantages illustrate why investing as an ordinary shareholder can be appealing, especially for those who are willing to embrace the associated risks for the potential of substantial rewards.
Ordinary Shareholder – Disadvantages
Higher Financial Risk Without Guaranteed Dividends
Ordinary shareholders face a higher level of financial risk compared to preferred shareholders because they are not entitled to guaranteed dividend payments. Preferred shares typically come with a fixed dividend, offering more stability and predictability in returns.
In contrast, dividends for ordinary shares depend on the company’s profitability and the discretion of its board, which may decide to reinvest profits back into the business instead of distributing them as dividends.
Subordination in Dividend Payments
While ordinary shareholders are entitled to dividends, they receive these only after all obligations to preferred shareholders have been met. This arrangement does not guarantee that ordinary shareholders will receive dividend payments, as the company may choose to retain earnings to support operational needs or future growth initiatives, potentially at the expense of dividend payouts to ordinary shareholders.
Lack of Redemption Rights
Preferred shares often include a call feature, allowing the issuing company to buy back these shares at a predetermined price, providing preferred shareholders with an additional exit strategy under certain conditions.
Ordinary shares lack this feature, leaving their holders more susceptible to market fluctuations. The value of ordinary shares is entirely subject to the market’s performance, which can lead to significant volatility in their investment value without the cushion of redemption rights.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.