Ordinary shares

What it means

Ordinary shares are the basic class of shares, carrying the usual rights of a shareholder: voting at the general meeting, sharing in profit through dividends and in the liquidation surplus when the company is wound up. Unless the statutes say otherwise, all shares are ordinary.

Holders of ordinary shares bear the most risk. In liquidation or bankruptcy they are paid only after creditors and any preference shareholders have been satisfied, so they often receive nothing. In return they enjoy the largest share of any growth in the company's value.

The extent of the rights is set by the share's nominal value. The number of votes usually follows the ratio of the share's nominal value to registered capital, as does the share of profit if the general meeting decides to distribute it to shareholders.

How it works in practice

The opposite is preference shares, which give priority on dividends or the liquidation surplus, often in exchange for limited voting rights. A company can combine both classes to raise capital from investors without the founders losing control.

A simple joint-stock company may also issue other share classes with special rights, such as multiple voting rights. Startups use this when investors come in: the founders hold ordinary shares and the investors hold preference shares.

In the books, the nominal value of subscribed shares is shown in registered capital and the difference between issue price and nominal value as share premium. Transfers of ordinary shares depend on their form; for book-entry securities, for example, they are registered with the central depository.

What to watch out for

A dividend on ordinary shares is not an automatic entitlement. The general meeting decides on profit distribution and may keep the profit in the company. A minority shareholder therefore has no guaranteed income, and their position is protected mainly by statutory rights to information and to challenge resolutions.

When registered capital is increased, existing shareholders usually have a pre-emptive right to subscribe for new shares so that their stake is not diluted. If they waive it or the statutes restrict it, their influence is diluted, so the terms should be checked in the statutes and the shareholders' agreement.