Deferred ordinary shares

3 key takeaways

• Deferred ordinary shares usually rank behind other classes of shares for dividend payments and capital repayments.
• These shares often receive dividends only after specified conditions are met, such as the payment of dividends to other shareholders.
• Deferred ordinary shares can be used by companies to incentivize long-term performance and align interests with company growth.

What are deferred ordinary shares?

Deferred ordinary shares, also known simply as deferred shares, are a type of equity that generally carries fewer rights compared to regular ordinary shares, particularly regarding dividend payments and capital distributions.

Shareholders of deferred ordinary shares typically receive dividends and capital repayments only after other classes of shares have been paid. This means that in the event of dividend distribution or company liquidation, deferred ordinary shareholders are last in line.

These shares are often issued to founders, employees, or other insiders as a way to align their interests with the long-term success of the company. By tying their financial rewards to the company’s performance and ensuring other shareholders are paid first, deferred ordinary shares incentivize these stakeholders to focus on the company’s growth and profitability.

Features of deferred ordinary shares

Deferred ordinary shares come with several distinctive features:

• Lower priority for dividends: These shares usually receive dividends only after other shareholders have been paid, and often under specific conditions set by the company.
• Capital repayment: In the event of liquidation, deferred ordinary shares are repaid after all other creditors and shareholders have been satisfied.
• Voting rights: Depending on the company’s articles of association, deferred ordinary shares may or may not carry voting rights.

These features make deferred ordinary shares a unique class of shares tailored to align the interests of certain stakeholders with the long-term goals of the company.

Reasons for issuing deferred ordinary shares

Companies may issue deferred ordinary shares for several strategic reasons:

• Incentivizing performance: By deferring dividend payments, companies encourage shareholders with deferred ordinary shares to focus on long-term growth and profitability.
• Aligning interests: Issuing these shares to founders or employees aligns their financial interests with the company’s success, fostering a culture of commitment and performance.
• Managing cash flow: Deferring dividend payments helps companies manage cash flow more effectively, ensuring that immediate financial obligations to other shareholders and creditors are met first.

These reasons highlight the strategic use of deferred ordinary shares in corporate financial management and incentive structures.

Impact on shareholders

Deferred ordinary shares can have various impacts on shareholders:

• Delayed returns: Shareholders of deferred ordinary shares may experience delayed returns on their investment, receiving dividends and capital repayments only after other shareholders.
• Potential for higher long-term gains: If the company performs well and meets the conditions set for deferred ordinary shares, these shareholders may eventually receive substantial dividends and capital repayments.
• Risk of no returns: In the event of poor company performance or liquidation, deferred ordinary shareholders are at greater risk of receiving little to no returns, as they are last in line for payments.

Understanding these impacts is crucial for shareholders when evaluating the potential benefits and risks of holding deferred ordinary shares.

Legal and regulatory considerations

The issuance and management of deferred ordinary shares are subject to legal and regulatory frameworks:

• Articles of association: The company’s articles of association will detail the specific rights and conditions attached to deferred ordinary shares, including dividend and capital repayment priorities.
• Shareholder agreements: Agreements between the company and shareholders may outline additional terms and conditions for deferred ordinary shares.
• Regulatory compliance: Companies must ensure compliance with local laws and regulations governing share issuance and shareholder rights to maintain transparency and fairness.

Adhering to these legal and regulatory frameworks is essential for the proper management and issuance of deferred ordinary shares.

Examples and case studies

Deferred ordinary shares are used in various corporate scenarios:

• Startup companies: Founders and early employees may receive deferred ordinary shares, aligning their financial rewards with the long-term success of the startup.
• Corporate restructuring: During restructuring, companies may issue deferred ordinary shares to incentivize management or key stakeholders to achieve specific financial targets.

These examples demonstrate the practical applications and strategic benefits of deferred ordinary shares.

Deferred ordinary shares provide a unique tool for companies to align stakeholder interests with long-term performance and manage financial priorities. By understanding their features, benefits, and regulatory considerations, shareholders and companies can effectively use deferred ordinary shares to achieve strategic financial and corporate goals.