For aspiring entrepreneurs venturing into the Singaporean business landscape, an SME is allowed to issue shares in different classes. This can be a good way to raise capital through equity while retaining closer control, or ensuring different members of the company can balance their interests in a way that facilitates streamlined management of the company.
Many Small and Medium Enterprises (SMEs) are incorporated as private companies limited by shares, which means that the owner of a company and the company itself are separate legal entity and the potential losses are limited to the value of their shares. This means that if a company only issues ordinary shares, all the shareholder have the same voting power
Under the Company Act (CA), a company may issue different classes of shares and each classes of shares can have different shareholder rights. For example, some shares may have certain dividend in return for giving up voting right.
In this way, the founder of a company can maintain substantial control over the company even where only owns a minority of the shares.
Key rights include attendance and voting at meetings, profit participation, and prioritized asset distribution in case of winding up.
Diverse Classes of Shares may include:
- Ordinary shares: Common and bestowing voting rights, equal dividend participation, and a share in surplus capital during winding up.
- Non-voting shares: Denying attendance and voting rights, commonly issued to employees or shareholders' family members.
- Redeemable shares: Entailing a buyback option by the company, securing holders' right to capital repayment.
- Preference shares: Offering preferential dividends and potential priority in capital return during winding up.
- Deferred ordinary shares: Deferring dividend payment until other classes receive a stipulated minimum.
- Management shares: Bestowing extra voting rights to certain shareholders, often enabling founders to retain control.
- "Alphabet shares": Introducing classes like 'Class A', 'Class B', etc., allowing nuanced differences in rights among shareholders.
In Conclusion
While many startups begin with equal share rights, the freedom to tailor management control and entitlement to profits or capital allows for sophisticated equity frameworks. Singapore's legal flexibility accommodates diverse investor needs, emphasizing the importance of understanding the motives behind multiple share classes. Entrepreneurs contemplating this route should carefully evaluate the rights associated with each class, ensuring alignment with their business goals.