Area of Law: Business Law
Answer # 222
Common and preferred or special sharesRegion: Ontario Answer # 222
If you hold common shares, you are a part-owner in the corporation. Common shareholders, however, have a higher risk of losing all or part of their investment if the company fails because the business’ creditors and preferred shareholders are ahead of the common shareholders in claiming the assets of the company.
In both private and publicly traded companies, there may also be different classes of common shares. For example, some may have voting rights and no dividends and others may have no voting rights but do pay a dividend.
As noted, preferred shareholders have greater rights to the company’s ownership above those of the common shareholders but below creditors. In most corporations, preferred shareholders receive a higher dividend than common shareholders. As a result, preferred shares are often valued higher than common shares. However, most preferred shares do not carry voting privileges.
All shares carry a right to vote at shareholder meetings unless a corporation’s Articles state otherwise. A voting right entails the right to attend meetings where the vote could be cast as well as the right to timely and adequate notice of such meetings. A general rule is that each share carries one vote on all issues at every shareholders’ meeting unless the corporate constitution limits this right by class. Consequently, if one class of share holds two of the fundamental rights, the third fundamental right must be held by at least one other class of share.
The three fundamental rights are the rights to:
- Vote at shareholder meetings,
- Receive dividends declared by the corporation,
- Receive a portion of a corporation’s property upon its dissolution (subject to any claims against the corporation by non-shareholders, such as creditors).
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