Common shares vs. preferred shares

The authorised share capital of a corporation may provide for several classes of shares. In this case, the articles of the company will provide for rights and restrictions associated with the shares of each class.

The first class, often referred to as the "A" class of share capital, is the class of shares known as "common". When a corporation is formed and the first shares are issued, common shares are usually issued to the founders of the company. The main characteristics of common shares are as follows:

• Voting rights at shareholders' meetings. The shareholders' vote allows voting in the election of directors and therefore more than 50% of the voting rights confers control of the company, unless a unanimous shareholders' agreement restricts this voting right.
• Entitlement to dividends. This entitles the holders of ordinary shares to a share of any dividends declared by the company, subject however to any priority rights that other classes of shares may have over the ordinary shares.
• Right to remainder. The residual entitlement of holders of ordinary shares confers the right to receive a portion of the residue following liquidation or dissolution of the company. As with the dividend entitlement, the residual entitlement will generally be subject to priorities of other classes of shares.

Another type of share found in the authorised share capital of a company is the so-called "preferred share". Preferred shares generally have the following characteristics:

• No voting rights.
• The right to a dividend equivalent to a percentage of the amount paid for the shares. This dividend is generally payable in priority to the ordinary shares. The dividend may be cumulative or non-cumulative, depending on the description of the share class.
• Right to reimbursement of the issue price of shares in the event of liquidation or dissolution, payable in priority to ordinary shares.
• Redeemable at the option of the company and/or at the option of the holder of the shares for a redemption value established in the articles of association.

Preference shares can be used in different contexts. For example, preferred shares can be issued to an investor who will receive a return on the amount invested in the company. Preferred shares can also be issued as part of a "tax rollover" from property to the company or to effect an estate freeze.

Although preferred shares have priority rights over common shares, the increase in value of the company is generally reflected in the common shares. Thus, the common shares are said to be "participating" shares.

Note that in cases where a company has no description of share capital in its articles, the shares it issues will be deemed to have the three basic rights of common shares, i.e. voting rights, dividend rights and residual rights.