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If you own shares in a company, these shares may be categorised into a ‘class’. Shareholders may have different rights, depending on the class of shares they hold. These rights may include the right to attend meetings, vote, and receive dividends. Sometimes, however, you can have a class of non-voting shares. There are many reasons for issuing a non-voting share. This article will explain what non-voting shares are and why you would issue them to shareholders.

What Is a Non-Voting Share?

Typically, the main types of shares that a company can issue are:

Ordinary Shares These are the most common class of shares that Australian companies issue. They generally give the shareholder the right to attend meetings, vote and receive dividends. This class of shares generally do not carry any special or preferred rights over other shareholders.
Preference Shares As the name suggests, these shares have preferential rights attached to them. Preference shareholders will often have priority over ordinary shareholders to receive dividends and distributions of the company’s assets on winding up.
Non-Voting Shares A non-voting share is a share in the capital of a company that belongs to a class that has no voting rights. This is distinct from, for example, an ordinary share which gives the shareholder standard rights to vote at shareholder meetings in proportion to their shareholding. Upon issuing shares to a shareholder, the subscription documents and share certificate will specify the class of shares.

Why Have Non-Voting Shares?

A company will typically implement this type of share for individuals who want to invest in the company’s profitability and success without the benefit of voting rights or having a say in the management or control of the company. For example, a company may issue employees with non-voting shares because they want them to benefit from dividends or distribution of profits from a sale. However, they do not want them to participate in decision making.

Non-voting shares often arise when company founders or directors seek to raise new share capital but do not want to dilute their control. In such cases, they often issue large numbers of non-voting shares while keeping control of the original voting stock. Thus, issuing non-voting shares allows the main shareholders to retain control of the company whilst multiplying the number of shareholders.

Rights of Non-Voting Shares

The company constitution will typically set out all share class rights and any restrictions attached to them. Also, the company or board resolution may detail further terms of the issue. 

Additionally, an incoming shareholder must review the company constitution to understand the exact restrictions that come with the class. 

A company can also create new classes of shares or vary existing classes of shares if required. But, again, this will depend on the rules set out in the company’s constitution or shareholders agreement.

Additional Rights to Non-Voting Shares

Typically, the non-voting stock has other rights that compensate for its lack of voting powers. For example, most preferred stocks that have a guaranteed dividend are non-voting, while most voting stocks depend on the company’s performance to receive dividends.

Holders of Voting Shares vs Non-Voting Shares

From an economic standpoint, either type of share will benefit a company, as the buying and selling of shares generate income for the business. Even shareholders who own non-voting shares still get to own a piece of the business. The key difference between voting and non-voting shares ultimately comes down to the level of management, control, and influence a shareholder will have over the business’s day-to-day operations.

Key Takeaways

Understanding the differences between voting and non-voting shares is essential. Therefore, it is crucial that you consult a business lawyer before issuing shares or creating a capital structure. For more assistance in understanding voting and non-voting shares, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

Why would a company issue non-voting shares?

A company may issue employees with non-voting shares because they want them to benefit from dividends or distribution of profits from a sale but do not want them to participate in decision making. Likewise, issuing non-voting shares allows the main shareholders to retain control of the company whilst multiplying the number of shareholders.

What other types of shares can a company issue?

The main types of shares that a company can issue are ordinary shares, preference shares and non-voting shares. Ordinary shares are the most common class of shares, giving shareholders the right to attend meetings, vote and receive dividends. Moreover, preference shares give shareholders priority over ordinary shareholders when it comes time to receive dividends and distributions. Finally, non-voting shares give individuals a piece of the company without the benefit of voting rights or a say in management decisions.

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