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In the context of a limited liability company (LLC), you may have come across the phrase ‘classes of interest’. Within an LLC, you may have several shareholders who have each invested different amounts of money into the company. Subsequently, each shareholder may have different types of shares with different rights attached to them. In this sense, classes of interest refer to the different levels of shareholder rights within a company. 

This article outlines the following:

  • different classes of shares within a company; and
  • types of shares in a company, with a focus on ordinary shares.

By knowing what classes of interests are, you can better understand your rights as a shareholder within an LLC.

Different Classes of Shares

After an LLC has gained the consent of its current shareholders, the company can create infinite classes of ordinary shares. These classes of shares are typically alphabetised and often contain quite varied rights to suit a specific company structure. 

For example, the High Court has dealt with the allocation of shares for an improper purpose. In this case, the LLC in question had three distinct share classes:

  • class A gave unlimited voting rights to the managing director;
  • class B gave full voting rights to the director’s spouse upon the director’s death; and
  • class C gave no voting rights but a right to share in the profits.

As you can tell from the example above, classes of interests can contain unique rights and obligations as specified in a company constitution. However, these classes generally impact a shareholder’s entitlement to vote, participation in dividends and participation in the winding up of a company. 

Entitlement to Vote

Importantly, ordinary shares typically carry one vote per share. This means that in shareholder meetings, your ability to influence the outcome of the resolution generally depends on how many shares you have in the company. 

Likewise, voting power can change depending on what the company constitution and the Corporations Act specifies. For example, an LLC can give non-voting shares to passive investors to receive dividends but not affect how the company operates.

Entitlement to Dividends

As you likely know, a company can distribute its profits to its shareholders in the form of dividends. An ordinary share might entitle you to a normal dividend in certain circumstances. However, this can vary with a preferential share where shareholders will be paid a fixed amount before other share classes. The priorities to dividend payment can affect which shareholders do and do not get dividends at a given time.

Entitlement to Capital Upon Winding up the Company

When you wind up a company, a liquidator will sell all business assets and subsequently use the proceeds to pay off the company’s debts in order of priority. Once all debts have been repaid, there may be assets leftover. Accordingly, the liquidator will distribute any leftover funds to shareholders. Again, different classes of share may have different rights to capital distribution.

Different Types of Shares

There are two main types of shares that an LLC can issue, that being ordinary and preference shares. However, as mentioned, a company can create an infinite variety of share classes with different combinations of entitlements to suit their company structure. Nevertheless, we consider the entitlements attached to ordinary shares and preference shares.

Ordinary Shares

As the most common type of shares in Australian LLCs, ordinary shares carry one vote per share. So, if you own fifty ordinary shares in the company, you can advance fifty votes in a shareholder meeting. In addition to voting rights, ordinary shares also allow you to attend a company’s general meetings

Ordinary shares also entitle its shareholders to participate in company dividends. Of course, the dividend amount that an ordinary shareholder receives will depend on the company’s profits. Additionally, ordinary shareholders will only receive a dividend payment after the company pays off any preferential dividends. Therefore, the amount of dividends you receive may not be in proportion to your shareholdings due to the existence of other preferential classes. 

Preference Shares

Preference shareholders are generally entitled to the same rights as ordinary shareholders, including rights to: 

  • attend and vote in general meetings; 
  • participate in the winding up of the company; and
  • participate in company dividends.

However, preference shares are different from ordinary shares in that preferential shareholders will typically receive dividends before other shareholders. Additionally, if the LLC is wound up, a liquidator will allocate the proceeds to the preference shareholders before the other classes of shareholders. 

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Key Takeaways 

Classes of interest within a corporation refer to the different rights a shareholder has within a company. Depending on what type of shareholding you have in a company, this will affect your:

  • ability to vote in shareholder meetings;
  • entitlement to dividends (if any); and
  • priority to capital in the event that the company is wound up. 

If you need help understanding classes of interest within a corporation, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Where can I find what class of shareholder interest I belong to in a corporation?

If your company has a constitution, it will usually set out the rights which attach to each class of shares. 

What are preemptive rights?

Preemptive rights entitle shareholders of a company to subscribe to new shares or purchase existing shares in the company before any third party. 

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