What are preference shares in a UK company?

Published: 23rd July 2021

UK companies can offer various types of shares, generating vital funding and allowing investors to reap the rewards as the business grows. Ordinary shares and preference shares are just two types of share a company can create.

Companies might offer different share classes to attract funding and investment, perhaps control where dividend income is directed, or even influence an investor’s right to vote on company matters.

Shares in UK companies may also be made available to employees as an incentive to retain talented staff. The purchase of shares confers different rights to shareholders, however, and these are typically laid out in the company’s Articles of Association.

Three principal rights are:

  • Rights to vote – ordinary shareholders typically hold the right to vote
  • Entitlement to dividends – this may be the right to receive a dividend in priority to other shareholders, or perhaps a fixed dividend level
  • Entitlement to the distribution of capital on winding up – should the company undergo dissolution, shareholders may be ranked before others to receive priority payment

So what are preference shares, and how do they compare with ordinary shares in a UK company?

Begbies Traynor Group is the UK’s leading independent business recovery specialist, and can offer you independent advice and guidance on preference shares. 

What are preference shares?

Preference shares are sometimes known as ‘preferred stock.’ They are a special class of share offering distinct advantages to those purchasing. A significant benefit of holding preference shares in a company is that shareholders are paid a dividend in priority to holders of ‘ordinary’ shares.

They are also prioritised should the company need to be liquidated. Some downsides exist for holders of preference shares, however, and these need to be taken into account prior to investing.

Holders of preference shares are not entitled to vote, and so cannot influence decisions made at shareholder and general meetings. The type of decisions that might be made at these meetings include whether or not a dividend should be issued at certain times during the year, as opposed to reinvesting profits into the company for growth reasons.

Benefits of preference shares

The prioritisation of dividend payments is a key benefit for preference shareholders, making the purchase of this type of share potentially more appealing to risk-averse investors in UK companies.

Whether an investor purchases preference shares or ordinary shares can be due to their attitude to risk, and general overall objectives or investment strategy. Owning preference shares in a UK company certainly offers many benefits, not least of which is the preferential payment of dividends.

What are ordinary shares?

Ordinary shares can also be referred to as ‘common stock.’ This type of share offers the right to vote at general shareholder meetings and influence company decisions, with the typical scenario being one vote per share.

Ordinary shareholders might vote at a general shareholder meeting on whether a dividend should be issued, for example, or at annual general meetings on other administrative company matters.

Ordinary shares rank after preference shares in terms of dividend payment and rights to capital distribution. Companies can create different classes of ordinary shares, however – perhaps putting in place voting restrictions.

What are cumulative and non-cumulative preference shares?

It can be beneficial for preference shareholders to hold cumulative preference shares. This is because, if ordinary shareholders vote against the payment of a dividend, the right to that dividend payment then accumulates.

If two or more dividend payments are missed on account of a shareholder vote, all payments can be rolled over, which provides clear benefits to investors. Non-cumulative preference shares, on the other hand, mean that dividend income may be lost following a shareholder vote.

One of the rights of preference shareholders is typically to receive a fixed level of dividend. Again, this is paid in preference to ordinary shareholders, with the dividend amount usually calculated using a percentage of the nominal value of the shares.

If you would like more information on preference shares in UK companies please get in touch with our partner-led team at Begbies Traynor Group to arrange a free, same-day meeting. We operate an extensive network of offices around the country, so we can quickly address your queries or issues.

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