An important step to setting up your company is the allocation of shares to shareholders. Depending on your business structure, the types of shares you issue may vary.
Lawpath offers an incorporated online tool to register your company, with a fixed array of share classes to choose from. Learn about the different categories of share classes below.
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What are share class codes?
When allocating your shares, there can be different rights and limitations associated with different share categories. For instance, you may want to give some shareholders voting rights in company decisions, while others may only be allowed to receive dividends. A share class code is simply an acronym assigned to the different types of share classes.
The two major types of shares are ordinary shares (common stock) and preference shares (preferred stock). Generally, businesses starting out select ORD.
Ordinary Shares – ORD
These are the most commonly traded type of shares in Australia. When investors refer to ‘shares’, they are usually talking about ordinary shares. These will give the shareholder the following rights:
- Right to get notice of and attend a meeting of members
- Right to vote on matters of the company
- Dividends
- Right to a distribution of surplus assets if the company winds up
A and B Ordinary Shares
Some companies create more than one class of ordinary shares. For example, an “A” ordinary share may have the above ORD rights, while a “B” ordinary share may have:
- Right to dividends
- No right to receive notice of or attend general meetings
- No right to vote on matters of the company
Founder’s Shares – FOU
These are shares issued to founders of the company. FOU shares are essentially ordinary shares. However, special features can be included under the Company Constitution:
- Do not usually receive returns until dividends is paid out to common stockholders
- Vesting period can begin immediately (not subject to “one year cliff” as ordinary shareholders)
- Acceleration Clause (Augmented vesting in case of termination)
- Negligible par value (Little to no upfront payments)
Preference Shares – PRF
As the name indicates, preference shares are ranked above ordinary shares. In the case of a liquidation of assets, preference shareholders receive priority to repayments. Other rights include:
- Fixed and accrued dividends (increased security and certainty for shareholders)
- Priority repayment of capital in cases of insolvency
Cumulative Preference Shares – CUMP
Dividends will accumulate under an arrears even when the company does not have the profit to pay out until the balance is paid off to the shareholders. As a preference share, payouts will be in priority to ordinary shares.
Non-Cumulative Preference Shares – NCP
Unlike cumulative preference shares, owners of non-cumulative shares aren’t eligible to any of the dividends they missed. As a preference share, payouts will be in priority to ordinary shares.
Redeemable Preference Shares – REDP
These shares can be redeemed for cash anytime at the company’s discretion. There is usually a vesting period before such rights can be accrued. REDP allows for greater flexibility and liquidity of assets. Payouts will be in priority to ordinary shares.
Non-Redeemable Preference Shares – NRP
NRP shares cannot be redeemed for cash during the lifetime of the company. These shares can only be redeemed once the company goes into liquidation. As a preference share, payouts will be in priority to ordinary shares.
There is a greater demand by shareholders for preference shares in startup companies as they can receive assurance of recompense in cases of liquidation.
Conclusion
Although the above codes are the most common share classes, they are not definitive. Depending on their goals, different companies may require different share classes. Lawpath offers professional legal services and can help you determine the right share class code for your company by connecting with a company starter lawyer. If you are just starting out, Lawpath can also help you register your company.
LawPath can assist with your company registration. Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our lawyer marketplace or any other legal needs.
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