3.3 Ownership Flashcards
What is the liability of shareholders?
Shareholders have limited liability, meaning they are only responsible for paying for their shares and are not personally liable for company debts.
What are the two main types of shares?
Common Shares (Class A)
Preferred Shares (Class B)
What rights do common shareholders (Class A) have?
Right to vote for directors
Right to receive dividends if declared
Right to receive residual assets after liquidation (once creditors and preferred shareholders are paid)
Why do companies issue shares?
To raise working capital without taking on debt.
What is the downside of issuing more shares?
It dilutes ownership and voting power of existing shareholders.
What is the difference between issuing shares and taking a bank loan?
Issuing shares = No repayment obligation, but dilution of ownership.
Bank loan = Debt to be repaid with interest, but no loss of control.
What is the difference between preferred (Class B) and common (Class A) shares?
Preferred shares usually do not have voting rights.
Preferred shareholders receive fixed dividends first before common shareholders.
In liquidation, preferred shareholders are paid before common shareholders.
Where are the rights of different share classes defined?
In the articles of incorporation.
What are dividends?
Surplus profits paid to shareholders at the discretion of the board of directors.
When are dividends paid?
Only when declared by the board of directors and only from surplus profits.
What are the two types of preferred share dividends?
Cumulative Dividends – If unpaid in one year, they accumulate and must be paid later.
Participating Dividends – Preferred shareholders receive their fixed dividend plus an additional dividend as if they were common shareholders.
What are convertible shares?
Shares that can be converted from one class to another, e.g., preferred shares converting into common shares.
When might non-voting shares be converted into voting shares?
If dividends have not been paid for a certain period, giving shareholders power to remove directors.
What are redeemable shares?
Shares that the company has the right to buy back for restructuring.
What are retractable shares?
Shares that give shareholders the right to force the company to buy back their shares, usually if dividends go unpaid.
