Kinds of Share Capital and Voting

In one line

A company limited by shares has only two kinds of capital, equity and preference, distinguished by preference in dividend and in return of capital; votes ordinarily follow paid-up equity, preference shareholders vote only on what touches them, and class rights cannot be varied without the class's own three-quarters consent.

In exam wording: under section 43 the share capital of a company limited by shares is of two kinds, equity share capital, with voting rights or with differential rights as to dividend, voting or otherwise in accordance with the prescribed rules, and preference share capital; and under section 47(1) every member holding equity share capital has a right to vote on every resolution, his voting right on a poll being in proportion to his share in the paid-up equity share capital.

Why the law has this at all

A company needs money from people with different appetites. One investor wants the upside and will accept the risk of getting nothing; another wants a steady return and priority if things go wrong. If the law offered only one kind of share, the second investor would have to be a lender, and companies with limited borrowing capacity would be starved.

Preference capital is the answer: it is equity in law and debt in economics. The holder is a member, not a creditor, so he cannot sue for his dividend as a debt and ranks behind creditors on winding up; but within the membership he has priority in dividend and in the return of capital.

That hybrid character explains the voting rule. Voting exists so that those bearing the residual risk can control the enterprise. A preference shareholder bears less of it, so s.47(2) confines his vote to what actually affects him, and restores a full vote when his dividend goes unpaid for two years, because at that point his economic position is no better than an equity holder's.

Section 43: the two kinds

Equity share capital, by clause (a), is capital with voting rights or with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed. The Explanation adds the residual definition: equity share capital means all share capital which is not preference share capital.

Preference share capital, by clause (b) and Explanation (ii), is that part of the issued share capital which carries or would carry a preferential right with respect to (a) payment of dividend, either as a fixed amount or at a fixed rate, free of or subject to income tax; and (b) repayment, on a winding up or a repayment of capital, of the amount of the share capital paid-up or deemed paid-up, whether or not with a preferential right to a fixed premium.