In Short
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Unlike ordinary shares, non-voting shares are a class of shares that give investors a stake in a company but no voting rights at shareholder meetings.
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Companies issue non-voting shares to raise capital (or reward employees) while allowing founders or key shareholders to retain decision-making control.
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Non-voting shares can still carry economic benefits, such as dividend rights or a share of proceeds if the company is sold, even without voting power.
Tips for Businesses
Before issuing non-voting shares, check your company’s constitution and clearly define the rights of non-voting shares in writing. Use non-voting shares to raise funds or reward staff, but keep control over decisions. Always document dividend policies and class rights to avoid future disputes.
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 to issue non-voting shares. 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 classes of shares issued by Australian companies. They generally give shareholders 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. 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 voting rights 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 issue this type of share to individuals who want to invest in the company’s profitability and success without the benefit of voting rights or a say in the management or control of the company. For example, a company may issue non-voting shares to employees because it wants them to benefit from dividends or distributions 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 without diluting 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 principal shareholders to retain control of the company whilst multiplying the number of shareholders.
Continue reading this article below the formRights of Non-Voting Shares
The company constitution should 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.
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, some preferred stocks may have a guaranteed dividend but are non-voting, offering investors the upside of guaranteed returns while giving the Company greater decision-making flexibility.
Dividend Rights
Non-voting shareholders typically retain necessary economic rights despite lacking voting power. Dividend rights allow non-voting shareholders to receive distributions from company profits, though the company constitution may specify dividend rates or priorities different from those for ordinary shares.
Pre-emptive Rights
Pre-emptive rights give non-voting shareholders the opportunity to maintain their proportional ownership by purchasing new shares before they are offered to external parties, thereby protecting their economic interest in the company from dilution.
Information Rights
Information rights ensure non-voting shareholders can access the company’s financial statements, annual reports, and material information about its performance, allowing them to make informed investment decisions despite having no say in company management.
Practical Implementation
Implementing non-voting shares requires several key steps and documentation, depending on the company’s constituent documents.
Generally, the company must first amend its constitution to create the new share class, specifying the exact rights and restrictions that apply to the new shares. The amendment of the constitution must be approved by at least 75% of the shareholders’ votes.
Once approved, the directors should pass a resolution authorising the issue of non-voting shares, detailing the number of shares, issue price, and specific terms applicable to the class. The company may be required to follow the pre-emptive rights procedure and have the existing shareholders waive these rights.
Each incoming shareholder should sign a subscription agreement that outlines the rights and limitations of non-voting shares to ensure incoming shareholders understand their position, while existing shareholders’ agreements may need updating to address how non-voting shares interact with existing arrangements.
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 following:
- the level of management;
- control; and
- influence a shareholder will have over day-to-day operations.
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Key Takeaways
Non-voting shares give companies a flexible way to raise capital without giving up control. While these shares do not give shareholders a say in management, they often come with important economic benefits, such as dividends and information rights. For founders and existing voting shareholders, this structure preserves decision-making authority while still allowing broader participation in the company’s financial success. Ultimately, choosing to issue non-voting shares depends on a company’s goals, its governance structure, and the commercial arrangements it wishes to put in place.
If you have any questions regarding voting rights, 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
Usually yes, although dividend rates or priorities may differ depending on the company’s constitution.
Sometimes. Certain classes may gain voting rights in specific situations if this is set out in the company documents.
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