Understanding the different types of shares in a company is essential for investors, entrepreneurs, and corporate lawyers alike. Under the Companies and Allied Matters Act (CAMA) 2020, Nigerian companies may issue distinct classes of shares each carrying different rights, risks, and financial implications. This guide breaks down every type of share recognised under Nigerian company law so that you can make informed decisions about corporate structuring and investment.
What Is a Share? (Legal Definition)
A share represents a unit of ownership in the capital of a company and defines the extent of a shareholder’s interest (CAMA 2020, s. 868). It entitles the holder to certain rights, including participation in profits, voting at company meetings, and a claim to assets upon winding up (E. O. Akanki, Essays on Company Law, University of Lagos Press, 1992, p. 112).
Under CAMA 2020 (s. 143), a company may issue different classes of shares with varying rights. These shares are typically classified based on their rights, ownership structure, and role in a company’s capital composition.
Types of Shares in a Company Under Nigerian Law
Nigerian company law recognises three primary categories of shares: Ordinary Shares, Preference Shares, and Deferred (Founders’) Shares. Each comes with its own set of rights and obligations.
1. Ordinary Shares (Equity Shares)
Ordinary shares, also called equity shares, are the most common type of shares issued by a company. They represent residual ownership: after all debts and obligations are settled, ordinary shareholders own what remains (L. B. Curzon, Company Law, Pearson, 2011, p. 78). Unlike preference shares, ordinary shares do not carry preferential rights, but they do grant shareholders voting power and entitlement to variable dividends (CAMA 2020, s. 116(1)).
Key Features of Ordinary Shares
- Voting rights: Ordinary shareholders vote on key company decisions at general meetings.
- Variable dividends: Dividends are not fixed and depend on the company’s profitability.
- Last in line during liquidation: In the event of winding up, ordinary shareholders are paid only after creditors and preference shareholders.
Classifications of Ordinary Shares
Ordinary shares can be further broken down into the following subcategories:
1. Authorized Share Capital
Authorized share capital is the maximum amount of share capital a company is permitted to issue, as stated in its Memorandum of Association (CAMA 2020, s. 27). It sets the ceiling on how many shares the company can ever offer to the public or private investors.
2. Issued Share Capital
Issued share capital is the portion of the authorized capital that has actually been issued to shareholders (CAMA 2020, ss. 124 & 868). A company does not have to issue all its authorized shares at once it may issue them in tranches as needed.
3. Subscribed and Paid-Up Capital
Subscribed capital refers to the portion of issued shares that investors have agreed to purchase, while paid-up capital is the amount shareholders have actually paid for their shares (L. C. B. Gower, Gower’s Principles of Modern Company Law, 10th edn, 2016, p. 280). The gap between these two figures may be called “calls in arrears.”
4. Voting and Non-Voting Shares
Voting shares entitle the holder to participate in decision-making at general meetings, while non-voting shares do not (CAMA 2020, s. 140). Non-voting shares are sometimes issued to raise capital without diluting control among existing shareholders.
5. Sweat Equity Shares
Sweat equity shares are issued to employees or directors as compensation for their contributions such as technical know-how or intellectual property rather than cash payment (CAMA 2020, s. 146). They are a common tool for startups and technology companies looking to attract and retain talent.
6. Bonus Shares
Bonus shares are additional shares issued to existing shareholders at no cost, funded from the company’s retained earnings or reserves. They do not dilute ownership but increase the number of shares in circulation and can reflect the company’s strong financial health.
2. Preference Shares
Preference shares occupy a privileged position in a company’s capital structure. Holders enjoy priority over ordinary shareholders in the payment of dividends and the return of capital upon winding up (CAMA 2020, s. 144). Under section 168(1) of CAMA 2020, preference shareholders are also entitled to attend general meetings and, in certain situations, such as during winding up or the removal and appointment of a company auditor, may be granted more than one vote per share.
Key Features of Preference Shares
- Fixed dividends: Preference shareholders receive a predetermined dividend rate, regardless of fluctuations in company profit.
- Priority in liquidation: They are paid before ordinary shareholders when the company is wound up.
- Limited voting rights: Under normal circumstances, preference shareholders have restricted voting rights compared to ordinary shareholders.
Types of Preference Shares
1. Cumulative Preference Shares
If a dividend is not paid in any given year, it accumulates and must be paid out in a future year before ordinary shareholders receive any dividend (L. B. Curzon, Company Law, p. 81). This makes cumulative preference shares a lower-risk investment option.
2. Non-Cumulative Preference Shares
Unlike their cumulative counterparts, unpaid dividends on non-cumulative preference shares are forfeited if not declared in a given year. There is no right to carry them forward.
3. Redeemable Preference Shares
These shares can be bought back by the company at a predetermined price and time (CAMA 2020, s. 182). They give companies flexibility in managing their capital structure, since they can reduce the number of outstanding shares once the company no longer needs that capital.
4. Convertible Preference Shares
Holders of convertible preference shares have the option to convert their shares into ordinary shares after a specified period or upon meeting certain conditions (L. C. B. Gower, Gower’s Principles of Modern Company Law, 10th edn, 2016, p. 292). This can be attractive to investors who want downside protection with the potential to benefit from equity upside.
5. Participating Preference Shares
In addition to a fixed dividend, participating preference shareholders are entitled to share in any surplus profits of the company alongside ordinary shareholders. This hybrid feature makes them particularly attractive in high-growth companies.
3. Deferred (Founders’) Shares
Deferred shares often called founders’ shares are typically issued to the original promoters or founders of a company (E. O. Akanki, Essays on Company Law, University of Lagos Press, p. 125). They are subordinate to both ordinary and preference shares in terms of dividend payment and capital repayment during winding up: deferred shareholders are paid only after all other shareholders have received their entitlements.
Despite this financial subordination, deferred shares often carry enhanced voting rights, allowing founders to maintain control over the company even as they bring in outside investors.
Frequently Asked Questions (FAQs) About Types of Shares in a Company
What is the difference between ordinary shares and preference shares?
Ordinary shares give holders voting rights and variable dividends but rank last in liquidation. Preference shares offer fixed dividends and priority in liquidation but typically come with limited voting rights.
Can a company issue both ordinary and preference shares?
Yes. Under CAMA 2020, a company may issue multiple classes of shares with different rights, as long as these rights are set out in the company’s Memorandum and Articles of Association.
What are bonus shares, and how do they differ from rights issues?
Bonus shares are issued to existing shareholders for free, funded from retained earnings. Rights issues, by contrast, offer existing shareholders the right to purchase additional shares at a discounted price before the company offers them to the public.
Conclusion
Shares sit at the heart of corporate structure and financing. Ordinary shares confer ownership and control; preference shares deliver financial security and priority; and deferred shares protect the founding vision of a company’s promoters. Understanding the distinctions between authorized, issued, subscribed, and paid-up capital — as well as the nuances within each share class — is indispensable for sound corporate governance, investment strategy, and legal compliance under CAMA 2020.
Whether you are structuring a new company, advising investors, or seeking to understand your rights as a shareholder, getting clarity on share types is a critical first step.
For expert legal advice on corporate structuring, share issuance, or governance under Nigerian law, reach out to us today through the live chat and WhatsApp icon on the right and left side of this page or send an email by using the link here to book a consultation, and we’ll attend to you.
References
- Companies and Allied Matters Act 2020 (CAMA 2020).
- O. Akanki, Essays on Company Law (University of Lagos Press, 1992).
- C. B. Gower, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell, 2016).
- B. Curzon, Company Law (Pearson, 2011).
