Common Shares Or Preferred Shares? What Are The Differences?
You have decided to take advantage of the benefits of incorporating. Most people have heard of shares in a company and have a pretty good idea of what shares are. Fewer people understand the difference between common shares and preferred shares. If you require more information after reading this, the corporate lawyers at Kahane Law Office in Calgary are happy to help. Call 403-225-8810 today.
Are you a new business owner and confused about share classification?
There is confusion for new business owners between the terms “common shares”, and “preferred shares”. Deciding which to use is also know as deciding your share structure. Alberta law makes understanding the difference between common shares and preferred more difficult. The Business Corporation Act (Alberta) doesn’t specifically define a “common share” or a “preferred share”. The type, and classification, of shares that a company is authorized to issue is set out in the “Articles of Incorporation” of the company
Generally speaking, a common share provides for an unlimited right to participate on a per-share basis in dividends (subject to board discretion and certain creditor protection tests in the legislation) and in the distribution of property of the company on dissolution (after satisfaction of the claims of creditors and preferred shareholders). A preferred share, on the other hand, generally confers a preference over common shareholders as to dividends or as to participation on dissolution, but generally limits the amount of such dividends to a fixed percentage of the share’s redemption value and also limits participation on dissolution to that redemption value plus unpaid dividends.
What about voting rights?
Voting rights can be conferred on either common or preferred share classes, and the right to vote is set out in the articles. Although if you hear the term “straight preferred” it usually refers to a preferred share that does not have voting rights.
What are the Pros and Cons of Common Shares?
The Pros of issuing commons include the representation of permanent capital with no obligation to pay by the company. In addition, there are no mandatory dividend requirements, it generally increases borrowing capacity (improves ratios such as debt to equity). Lastly, they generally have no conditions, covenants or restrictions. The Cons of issuing common shares is that owners must forfeit a measure of control (if the commons have voting rights). Further, dilution occurs of the per share value of the commons with each new issuance. The difference between common shares and preferred shares involve the rights assigned to each. Where common shares have none, preferred shares have more.
What are the Pros and Cons of Preferred Shares?
The Pros of issuing Preferred Shares is that you have flexibility to tailor the offering to market conditions, voting is optional not mandated, there is no obligatory drain on cash resources (unlike debt), they do not require return of principal (unless they have retraction rights), and they are less expensive than debt (in terms of financing costs). The Cons of issuing Preferred Shares is the fixed dividend obligations, the priority rank over commons in payment of dividends and return of capital on dissolution, they reduce the net asset value of the Common Shares, and you often have to make them convertible to Common Shares to make them marketable to investors.
Lawyers To Help You Understand The Difference Between Common Shares And Preferred Shares
Kahane Law’s startup business and entrepreneurial lawyers in Calgary help you understand the difference between common and preferred shares. We assist in drafting your articles of incorporation so that you have the share structure best for you. Start your company off on the right foot! Call us today! 403-225-8810 or email us directly here.