Why Do Companies Prefer Ordinary Shares Despite the Strategic Value of Other Share Types?

Why Do So Many Companies Choose Ordinary Shares Yet There Are Other Types of Shares? Isn't It Becoming a Custom Despite the Beauty in Other Types Depending on Specificity? A Deeper Look into Share Types and Their Strategic Value

When you think about company ownership, the first thing that often comes to mind is ordinary shares. But why do so many companies choose ordinary shares as their go-to form of equity? Is it because they align perfectly with the company’s growth and financial strategies, or is it simply a practice that has become the norm—an automatic choice that companies rarely question? More importantly, does this default approach overlook the potential benefits of other, less common types of shares that could better suit a company’s specific needs?

Understanding the Range of Share Types in Corporate Structures

Article 53 of the Law Governing Companies (N° 007/2021 du 05/02/2022) outlines the different types of shares that can be issued by a company. These include not only the most widely known ordinary shares but also other classes that offer varying degrees of control, financial benefit, and flexibility.

Here’s a breakdown of the options companies have when issuing shares:

1. Ordinary Shares: Ordinary shares are the most common form of equity in any company. They represent ownership in the business and typically come with voting rights and the potential for dividends. They provide a straightforward and familiar approach to structuring company ownership and equity financing. The primary advantage of ordinary shares is their flexibility—they allow companies to raise capital while giving shareholders a stake in the company’s performance, profits, and decisions. However, while ordinary shares are common, they may not always be the best fit for every business.
2. Redeemable Shares Redeemable shares allow the company to buy back the shares at a later date, either at the company’s discretion or upon reaching a pre-agreed date or condition. This gives the company more control over its capital structure and enables it to buy back shares when needed—ideal for companies seeking to manage ownership and cash flow more actively. For investors, redeemable shares may offer a safety net, knowing that their shares will be bought back under specific terms. However, they may come with less voting power and influence compared to ordinary shares.
3. Shares with Preferential Rights : Some shares confer preferential rights to distributions of capital or income, making them more attractive to investors who prioritize security and guaranteed returns. These types of shares are particularly common in private companies or startups looking to attract investors with fixed returns, like venture capital or private equity firms. Preferential shares ensure that their holders receive dividends or capital distributions before ordinary shareholders, making them a less risky investment. However, this may limit the potential for long-term growth or participation in the company’s broader success.
4. Shares with Special, Limited, or Conditional Voting Rights: Shares with special or limited voting rights may give specific investors or classes of shareholders more or less control over company decisions, such as mergers, acquisitions, or changes to the company’s governance. These shares may limit voting rights in specific situations or could provide greater influence to certain parties. For example, some companies use this structure to maintain control within a founding group while still raising external capital. This can protect the vision and decision-making power of the core leadership while still attracting investment.
5. Non-Voting Shares: In some cases, companies issue shares that do not confer any voting rights. These shares are often offered to investors who are more interested in the financial benefits—like dividends or capital appreciation—rather than having a say in company decisions. Non-voting shares are commonly issued in companies where a group of insiders or founders wish to retain control, while still raising capital from external investors. Non-voting shares can be beneficial for maintaining a concentrated power structure while still benefiting from outside investment.

Is the Default Choice of Ordinary Shares Always the Best?

While ordinary shares are undoubtedly the most common and widely recognized type of equity, they are not necessarily the best fit for every company. Many businesses, especially startups, growth-stage companies, or those looking for more control over their capital structure, may benefit from exploring alternative share types. The flexibility, voting power, and financial benefits that ordinary shares offer may not always align with a company’s goals or the needs of its investors.

For instance, companies aiming to raise significant capital while maintaining control may prefer to issue shares with preferential rights or redeemable shares. In this case, they can offer a guaranteed return to investors, while still keeping a firm grip on ownership and decision-making. On the other hand, companies looking to avoid dilution of their control might consider issuing shares with special, limited, or conditional voting rights. This allows them to retain the strategic decision-making power while raising funds from external investors who accept fewer rights in exchange for financial gain.

Why Companies Default to Ordinary Shares: The Need for Standardization, Hindering Specificity approach

Ordinary shares have become the default because they offer a balance of risk and reward, ownership rights, and control. They are simple, familiar, and provide a consistent structure that both companies and investors understand. They offer an easy path for raising capital without the complications of creating different classes of shares or dealing with specialized rights and restrictions.

However, as companies grow, diversify, and seek more complex financing structures, it may become apparent that other share types offer greater benefits and opportunities. The issue arises when companies don’t evaluate their options beyond ordinary shares, especially when they could create more tailored, strategic opportunities that meet their specific goals, protect key stakeholders, and offer attractive conditions to investors.

Choosing the Right Share Type: Aligning with Company Strategy

Choosing the right share type is about aligning with your company’s goals, market needs, and long-term plans. Companies should consider factors such as:

• The need for control: Does your company’s leadership want to retain full control over decision-making, or are you open to external influence?
• Investor preferences: What do your investors value most? Are they looking for security in the form of guaranteed returns, or do they prefer the opportunity for higher returns tied to company performance?
• Capital structure goals: Is your company seeking to raise large amounts of capital, or are you looking to manage debt and equity more effectively?

By carefully considering these factors and exploring different share structures, companies can craft a more strategic, tailored approach to raising capital, maintaining control, and fostering investor relationships. The key is to remember that ordinary shares are not the only option. In fact, other share types might be better suited for companies that require more flexibility, control, or investor security.

While ordinary shares are a default choice for many companies, they are not always the best fit for every situation. There are a variety of share types available, each offering unique advantages, depending on a company’s strategic goals, the nature of its investor relationships, and its capital structure requirements. Understanding these options and selecting the appropriate share type can empower companies to better meet their financial and governance objectives, ultimately leading to a more sustainable and successful future.

In today’s competitive and complex business environment, companies should avoid simply going with the flow and instead, carefully evaluate their specific needs to determine which share type will best align with their growth and vision.?

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal or financial advice. It is based on the author's personal insights and analysis, and should not be interpreted as advice to any specific individual or entity. The views expressed herein are solely those of the author and do not reflect the official position of any company or organization the author is affiliated with. Always consult with a qualified legal or financial professional before making any decisions related to share issuance or other business strategies.

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