Deferred Shares, also known as non-voting shares or restricted shares, are a type of equity security issued by a company that has specific limitations on the shareholder's rights compared to common shares. These limitations may include reduced or no voting rights, restrictions on dividend payments, or limited rights to company assets in the event of liquidation. Deferred shares are typically issued to provide a company with more flexibility in managing its capital structure and shareholder base.
Key characteristics of deferred shares include:
- Limited or no voting rights: Deferred shares usually do not grant the shareholder voting rights or have significantly limited voting rights. This feature allows the company to maintain greater control over its decision-making process while raising capital from external sources.
- Restricted dividend payments: Deferred shares may offer limited or no dividend rights, meaning that shareholders holding these shares may not be entitled to receive dividends or may receive dividends only after certain conditions have been met, such as the payment of dividends to common shareholders.
- Limited claim on assets: In the event of a company's liquidation, deferred shareholders may have a lower priority claim on the company's assets compared to common shareholders. This means that deferred shareholders may only receive a portion of the company's assets, if any, after the claims of common shareholders and other stakeholders have been satisfied.
- Convertibility: In some cases, deferred shares may be convertible into common shares, either at a predetermined date or under specific conditions. This allows deferred shareholders to potentially benefit from future growth in the company's value by converting their shares into common shares with full voting rights and dividend entitlements.
Deferred shares can be an attractive option for companies looking to raise capital without diluting control over their decision-making processes. They may also be used as a form of employee compensation, allowing employees to participate in the company's growth while not granting them voting rights.
However, deferred shares may be less attractive to potential investors, as they typically come with fewer rights and benefits compared to common shares. Consequently, deferred shares may trade at a discount to common shares, reflecting their limited rights and potential lower returns.
- Preferred Stock - Preferred Shares are another class of shares that may have specific rights, similar to Deferred Shares but usually with different priority and dividend rights.
- Stock - These are the standard equity shares in a company and are different from Deferred Shares in terms of voting and dividend rights.
- Dividend - Deferred Shares often have special rules regarding dividends, making them distinct from other types of shares.
- Capital Structure - Deferred Shares can play a role in a company's overall capital structure, which includes debt and various types of equity.
- Corporate Governance - Deferred Shares can impact corporate governance, particularly if they have special voting rights or other control mechanisms.
- Initial Public Offering (IPO) - While Deferred Shares are not commonly issued in an IPO, they may still impact a company's capital structure and valuation during an IPO.
- Stock Market - Though Deferred Shares are not commonly traded on public markets, their existence can affect a company’s stock market performance indirectly.