All You Need To Know About Shares & Shareholding Structures In Singapore
What is a Shareholder?
A shareholder is an individual or company who owns a share of a company, giving them ownership of a percentage of the company, regardless of how little or how many shares they own. They are also given a return on their share investment in the form of profit from the company and they are accorded the right to vote on behalf of the company’s matters.
Who Can Be a Shareholder?
Both a private company and/or an individual that is 18 years old or above can be a shareholder. Depending on the shareholding structure, private companies may be limited by shares. An exempt private limited company (EPC) is usually allowed a maximum of 20 shareholders, where none of its shareholders can be corporations. Whereas a non-exempt private company (NEPC) is a private company with more than 20 shareholders, but has a maximum limit of 50 shareholders, including shareholders that are incorporations. Corporate shareholders are required to appoint a corporate representative to sign off resolutions on behalf of the corporate entity in which he/she represents.
Corporate Shareholders VS Non-Corporate Shareholders
Corporate shareholders are when a corporation owns shares within another corporation. Whereas, a non-corporate shareholder is an individual that owns shares within a corporation. Due to the vast resources available to corporate shareholders, they are likely to buy and own large proportions of shares and they are also likely to be more active in the governance of a corporation in which they own shares. In some cases, corporate shareholders could lead to improved governance of a firm, which in hand can benefit non-corporate shareholders (individuals). On the other hand, with corporate shareholders heavily involved, the firm’s policies may be changed in order to benefit the larger investors and place the non-corporate shareholders in a less favourable position.
Shareholders have one primary responsibility which is to pay the full amount of the paid-up capital on their shares. However, shareholders are entitled to attend and participate in Annual General Meetings (AGM) and Extraordinary General Meetings (EGM), they also have access to a direct line of communication with the company’s board of directors in order for them to share their opinions on the company's matters and partake in influencing the company’s decisions.
In order for a shareholder to have a greater influence on a company’s corporate decision making process, the shareholder needs to accumulate a high percentage of shares, appointing that individual / company as a majority shareholder.
Usually, there are three types of business resolutions:
1. Ordinary Resolutions
2. Special Resolutions
3. Board Resolutions
Ordinary resolutions require upward of 50% of shareholders’ votes to successfully influence the resolution. An example of when an ordinary resolution would take place is an Annual General Meeting (AGM). Special resolutions require upward of 75% of shareholders’ votes to successfully influence the resolution. An example of when a special resolution would take place are in situations of reduction of share capital or changes in the constitution. Lastly, board resolutions are only passed by directors, usually with no shareholder involvement.
Rights of a Shareholder
Shareholders benefit from the following rights:
- Voting Rights
This is in terms of electing directors during a general meeting and approving directors’ fees.
- Profit-Sharing Rights
This indicates dividends, as they are subject to the company’s Constitution.
- Liquidation Rights
This is regarding distribution of assets (after paying creditors).
- Fair Treatment
This is a legal requirement.
This is in relation to communicating with members of the board or directors, through the mediums of calls or meetings.
Class of Shares
Shares come in different classes due to the versatility of the share system. What is the share system? The share system is a flexible range of categories in which shares can be placed depending on how a company decides to do so. This share system displays different classes of shares and their differentiating outcomes, in terms of rights and/or dividends of the shareholders. There are two primary classes of shares, being ordinary shares and preference shares.
An ordinary share allows their holders to have the right to vote and equal rights to attaining dividends. Often, companies will further categorise this class of shares alphabetically. An example of this is ‘Class A’ and ‘Class B’, the group of shareholders with a higher percentage of share ownership may be classified in ‘Class A’ as they have more influence during corporate decision making processes. Those shareholders with a lower percentage of share ownership may be classified in ‘Class B’ as they do not have as much influence during corporate decision making processes.
Preference shareholders are not entitled to any voting rights, however, they are still entitled to receive their dividends. In fact, preference shareholders receive their dividends prior to the ordinary shareholders, usually at a standard rate. Preference shareholders are also the first to be paid out in the situation where the company experiences liquidation. In the case where the preference shareholder’s dividends happen to be in arrears, they may be given the ability to be entitled to voting rights. Additionally, dome preference shares may allow the company to buy the shares back, under pre-agreed conditions.
Being a preference shareholder is likely to be a good choice for an investor that is not looking to actively take part in corporate decision making processes, however, still receive an annual pay check which can be a form of passive income.
Types of Share Transactions
Share transactions can come in the form of share allotments and share transfers. Share allotment is the process of issuing shares to either new or existing shareholders. When a business carries out a share allotment, it is likely to impact their shareholders' share ownership proportionately. Commonly, new shares are allocated in the case of new business partners.
Share transfers are the process of relocating shares from one shareholder to another, this is applicable to both new shareholders and existing shareholders. As long as the company has enough shares to transfer, after incorporation, it is possible to transfer shares anytime.
Both share allotment and transfer of shares involve holding a board meeting to come to an agreement as the structure of the shares within the company are changing. To finalise the decisions, the company may decide to issue a new or revised share certificate to the individuals/companies. Lastly, in cases with any change impacting the share structure of the company, the company will have to update their information to provide the most up to date information for others looking to invest.
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