Understanding Types of Stock and Their Rights in Modern Companies

In the evolving landscape of corporate finance, and the continuance need to change and evolve to maximize and distinguish the company in its industry. Companies have been issuing various types of stock to their investors, stakeholders and their management. Each issued stock represents ownership in the company; however, the issued stocks can differ in their type and confer various rights and privileges.

In this article, we will outline the most common types of stocks and their associated rights in accordance to best practices and their implementation and applicability subject to the Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443H (corresponding to 30/06/2022G) and Ministerial Decree No. (678) dated 29/11/1443H (corresponding to 28/06/2022G) and its Implementing Regulations issued by Ministerial Decree No. (284) dated 23/06/1444H (corresponding to 16/01/2023G) (the “Companies Law”).

The Companies Laws have stated that companies may issue more than one type of stock and class in addition to associating rights and restrictions to them. Pursuant to the Companies Law, the types of stocks stated are: (i) Ordinary Stocks, (ii) Preferred Stocks, and (iii) Redeemable Stocks and are subject to rights, privileges or restrictions as per the discretion of the stockholders of the company, whereby, the Companies Laws have not stipulated such rights, privileges or restrictions on these stocks, but rather entitled the stockholders to determine them.

Subject to the interpretation of the Companies Law and the stockholders’ discretion, the company may issue other types of stocks and classes, the most commonly issued stocks other than; (i) Ordinary Stocks, (ii) Preferred Stocks, and (iii) Redeemable Stocks, are as follows: (i) Non-Voting Stocks, (ii) Employee Stock Option Plan, (iii) Convertible Stocks, (iv) Participating Stocks, and (v) Treasury Stocks. Below we will outline the common rights, privileges and restrictions of each stock.

1.???? Ordinary Stocks:

Ordinary stocks are the most common type of stocks to be issued by all entities. Such stockholder have the right to vote on key corporate matters, including the election of the board of directors/board of managers, mergers, and amendments to the corporate charter and the dividends of the stocks are variable depending on the profit of the entity. In events of liquidation, ordinary stockholders are the last to receive in their claim in the entity’s assets.

2.???? Preferred Stocks:

Preferred stocks are the second most common stocks to be issued by entities, such stockholders are granted preferential rights over ordinary stocks. Additionally, stockholders of the preferred stocks typically have no voting rights, however, they receive dividends prior to ordinary stockholders in addition to entitling them to receive liquidation preference.

3.???? Redeemable Stocks:

Redeemable stocks can be repurchased or redeemed subject to the entity’s discretion, typically under predetermined conditions at a fixed prices calculated based on a formula specified at the time of issuance, stockholders of the redeemable stocks typically have no voting rights or restricted voting rights. However, such stockholders receive dividends prior to ordinary stockholder.

4.???? Non-Voting Stocks:

Non-voting stocks are issued to allow entities to raise capital without diluting the voting control of existing stockholders. Non-voting stocks may carry dividend rights similar to ordinary or preferred stocks, depending on the restrictions and rights set out by the entity.

5.???? Employee Stock Ownership Plan:

Employee Stock Ownership Plan (also known as ESOP) is a contribution benefit plan that allows employees to become a holder of stocks in the entity they are employed at. Whereby the company allocates a certain percentage of stocks for such ESOP as part of their authorized stock capital. ESOP typically have no voting rights. The ESOP will receive their portion of the dividend based on their percentage ownership and number of stocks owned in the entity.

6.???? Convertible Stocks:

Convertible stocks provide the option to convert them into another class of stocks, typically a predetermined ordinary stocks, subject to a conversion ratio determined at the time of their issuance. Convertible stocks may provide fixed dividends and have liquidation preferences similar to preferred stocks until they are converted. Post-conversion, their rights will be converted to the ordinary stocks.

7.???? Participating Stocks:

Participating stocks holders are granted with additional rights beyond the ordinary and preferred stocks, as they may participate in dividends beyond the fixed rate provided to preferred stockholders often sharing in the excess profits of the entity and may receive additional amounts beyond their preferred dividend in the event of liquidation sharing the remaining assets alongside ordinary stockholders.

8.???? Treasury Stocks:

Treasury stocks are owned by the entity, either repurchased from the stockholders or issued under the name of the entity, ?and are not considered when calculating dividends or earnings per stock. Such stocks have no voting rights and do not receive dividends,nor have any claim on the company’s assets in the event of liquidation (given that they are not owned by external stockholders).

For further information and assistance, please contact our team: Head of Associates Hanadi Jamjoom, LLM , and Associate Mawaddah Mahboob .