Description of shares: Overview, definition, and example
What is the description of shares?
The description of shares refers to the detailed explanation or classification of the different types of shares issued by a company. This description outlines the rights, privileges, and limitations attached to each type of share. Shares represent ownership in a company, and the description includes the terms of those shares, such as voting rights, dividend entitlements, liquidation preferences, and transferability. Companies issue various classes of shares to meet different financial, governance, or operational objectives, such as common shares, preferred shares, or restricted shares.
For example, a company may issue common shares that carry voting rights and dividend payments, while preferred shares might offer fixed dividends but no voting rights.
Why is the description of shares important?
The description of shares is important because it helps investors understand what rights and obligations they are assuming when they purchase shares in a company. This description ensures transparency and allows shareholders to make informed decisions about their investments. For companies, clearly defining the rights and characteristics of each share class helps manage expectations, ensures compliance with corporate governance, and provides clarity on shareholder rights in different circumstances, such as during mergers or liquidation.
For investors, understanding the description of shares is essential to assess the potential risks and rewards of owning a particular class of shares.
Understanding the description of shares through an example
Let’s say a company issues two types of shares: common shares and preferred shares. Common shares allow shareholders to vote at annual meetings and receive dividends, but dividends are not guaranteed. Preferred shares, on the other hand, do not come with voting rights but entitle the shareholder to a fixed dividend, which takes priority over common shares in the event of liquidation. The description of shares would outline these key differences, providing clarity on the privileges and risks associated with each type of share.
In another example, a startup may issue restricted shares to its employees as part of an employee stock option plan. The description of shares would clarify that these shares are subject to a vesting period and can only be sold or transferred after certain conditions are met, such as the employee staying with the company for a set number of years.
An example of a description of shares clause
Here’s how a description of shares clause might appear in a shareholder agreement or corporate document:
“The Company has issued two classes of shares: (1) Common Shares, each of which carries one vote per share and the right to receive dividends when declared by the Board of Directors, and (2) Preferred Shares, each of which does not carry voting rights but entitles the holder to a fixed annual dividend of 5% of the original issue price, payable before any dividend on Common Shares. In the event of liquidation, Preferred Shareholders are entitled to receive the full liquidation preference before any distribution to Common Shareholders.”
Conclusion
The description of shares provides important details about the different types of shares issued by a company, including their rights, privileges, and limitations. This description is crucial for investors to understand the value and implications of their investment, and it helps companies clearly communicate the terms of their share classes. Whether for common, preferred, or restricted shares, a detailed description ensures that all stakeholders are aware of their rights and obligations, supporting transparency and informed decision-making.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.