Companies may issue different classes of the same type of shares (e.g. ‘A’ ordinary shares and ‘B’ ordinary shares) or different types of shares (e.g. ordinary shares or preference shares). Different rights can be attached to different classes and types of shares for various purposes such as:

  • to distinguish voting rights in a company;
  • to prioritize distribution of dividends and assets of a company;
  • to issue shares to raise funds with debt features;
  • to cater to investors who only want to invest for a specific term by issuing shares which can be redeemed in the future, allowing the investor to exit.

Let’s examine the two common types of shares issued by companies and the different rights that could be attached to them.

Comparison between Ordinary Shares and Preference Shares

  Ordinary Shares Preference Shares

Most common type of shares issued. They are generally regarded as equity investments.

By definition, a preference share is a share by whatever name called, which does not entitle the holder to a right to vote or to participate beyond a specific amount in distribution of dividend, redemption or winding up. Preference shares can have both equity and debt characteristics, favoured by investors who have different priorities and interests to safeguard.


Suitable for parties that wish to exert some control (voting), participate in earnings (dividends) and growth (capital) of the company.

Preference shares are a useful investment tool for parties with the following objectives & requirements:


·         Investors who do not require voting rights and involvement in management of company;


·         Investors opting for medium risks and returns (lower risks compared to ordinary shareholders as preference shareholders have priority of receiving payment of dividends and capital); or


·         Investors who prefer a hybrid debt (with predictable/fixed returns) and equity investment exposure.


The terms of issue of shares need not be expressly set out in the company’s constitution, unless different ‘classes’ of ordinary shares are to be created. For example, ‘Class A’ ordinary shares, ‘Class B’ ordinary shares, can be specified in the constitution to create small differences between the classes. This includes allowing different dividends entitlements to each share class, or where different are to rules apply for ‘vesting’, share transfers, or exit valuation, etc.

The law requires that rights of preference shares must be expressly set out in constitution. Apart from rights expressly given in a constitution, preference shareholders have no other additional rights. A company may not allot any preference shares or convert any issued shares into preference shares unless there is set out in its constitution the rights of the holders of those shares with respect to:


·         repayment of capital;

·         participation in surplus assets and profits;

·         cumulative or non-cumulative dividends;

·         voting; and

·         priority of payment of capital and dividend in relation to other shares or other classes of preference shares.


Voting Rights

Ordinary shares by default confer on the shareholder full voting rights that enable the shareholder to participate in the decision-making process of a company. A different class of ordinary shares may be created in the constitution to confer ‘weighted votes’ for specific matters, giving the class of shareholders additional votes over the other ordinary shares.

The constitution of the company must either provide voting rights or expressly provide no voting rights on preference shares. Generally, preference shareholders are often not given voting rights, but have preferential rights in respect of its entitlement to dividends and have priority in being paid first compared to ordinary shareholders.


Unlike its 1965 predecessor, the Companies Act 2016 does not provide the statutory right for preference shareholders to vote. Therefore, it is no longer clear if the preference shareholders now have the right to vote in a winding up situation or when their preference dividends are in arrears.

Payment of Dividend

Ordinary shareholders receive their dividends after preference shareholders are paid.

Preference shareholders receive their dividends first in priority to ordinary shareholders.

Rate of Dividend

Dividends for ordinary shares are not fixed. The rate of the dividend is determined by the board of directors. The board will resolve whether or not there are available profits to enable dividends to be paid to the shareholders. There is no obligation on the directors to recommend a declaration of dividends at a general meeting. However, for distribution of dividends out of profits, the Companies Act 2016 now requires the board of directors to satisfy a solvency test (i.e. able to pay its debt as and when it is due within 12 months immediately after distribution).

The constitution of the company may confer on preferential shareholders the right to a fixed amount or rate of dividend, subject to the availability of profits of the company.  Alternatively, the constitution may confer on preferential shareholders the right to receive the same rate of dividends as ordinary shares but in priority to the ordinary shares. However, where dividends are to be distributed out of profits, the directors must be able to satisfy that the company will be solvent within 12 months immediately after distribution is made.


Ordinary shares have no right to an accumulation of dividends from previous years.

The constitution may confer on preference shares a cumulative right to dividends which entitles the preferential shareholder to accumulate unpaid dividends of the previous years. E.g. If the company did not declare dividends in year 2015 due to unavailable profits, the preferential shareholder will be owed the dividend for 2015 in the following year 2016 and paid when the company has sufficient profits.


In contrast, for non-cumulative preference shares, there is no right to an accumulation of dividends from previous years when dividends were unpaid.


All accumulated dividends must be paid to preference shareholders before any dividend for ordinary shareholders is declared.

Repayment of capital upon winding up of company

Upon the winding up of a company, the company must pay costs, wages, statutory contributions and taxes first followed by its creditors. Any capital that remains after paying the creditors is then allocated to the shareholders. Ordinary shareholders receive their share of the capital after preference shareholders are paid.

Preference shareholders are entitled to receive repayment of capital after creditors of the company have been paid, and in priority to ordinary shareholders.

Participation in surplus profits upon winding up of company

Ordinary shareholders are entitled to participate in the surplus profits or assets of the company which remain after repayment of capital.

Preference shareholders have no right to participate in surplus profits unless the right to participate in surplus profits is expressly set out in the constitution.


Ordinary shares cannot be redeemed by the company. Ordinary shares also cannot be repurchased by the company (save for a public company authorized by its constitution).

Redeemable preference shares (“RPS”) are a type of preference shares that are issued on terms that they may be redeemed in the future at the company’s option or subject to the terms of issue. It is considered to a hybrid of debt and equity depending on its exact terms, and can be issued for short term access to capital from investors. The issuance of RPS must be authorised by the constitution of the company and the redemption can be effected only on the terms and in such manner as provided by the constitution. The redemption must come from:


·         the available profits of the company which would otherwise have been available for distribution of dividends;

·         proceeds of a new issue of shares made for the purposes of redemption; or

·         capital of the company subject to a solvency statement made by all directors and lodging the solvency statement with the Registrar.




Ordinary shares are non-convertible to a different class of shares.

Convertible preference shares are preference shares which are issued with the right or option to convert to ordinary shares in the future, often at a pre-determined time frame and rate.


Have a query? Contact us.


Friendly Loans (The Edge, Consult the Experts, 11 January 2016)
Video: Unfair Dismissal in Malaysia

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