Lesson 2 of 8 · All lessons in this module
  1. Equity versus debt, why companies issue shares, and equity in global markets
  2. Common shares: voting rights, share classes, callable and putable shares
  3. Preference shares: cumulative, participating and convertibleVideo lesson
  4. Integrated cases: share classes, control and the liquidation ladder
  5. Private versus public equity: venture capital, buyouts and PIPEs
  6. Investing in foreign equity: direct, depository receipts, GRS and BLDRs
  7. Risk and return of different equity securities
  8. Book value, market value, ROE and the cost of equityVideo lesson

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Lesson 2 of 8 · 13 min

Common shares: voting rights, share classes, callable and putable shares

Common shareholders own the company's residual value and govern it by voting; how votes are counted and how share classes are designed decide who really controls the board.

In short

  • Common shares give a share of operating performance, voting rights and a residual claim in liquidation; dividends are not obligatory.
  • Shareholders vote on directors, mergers and auditors, usually at the annual meeting, often by proxy.
  • Statutory voting: one vote per share for each seat, so a majority holder wins every seat.
  • Cumulative voting: votes = shares × seats being filled, and they can all go to one candidate. This gives minority holders a chance of board representation.
  • Companies may issue classes of common shares with different voting, dividend or liquidation rights, often to keep control with founders.
  • Callable shares let the issuer buy them back at a preset price; putable shares let the holder sell them back to the issuer at a preset price.

What a common share gives you

Common shares are the main type of equity. Holders share in the company's operating performance, take part in governance through voting rights, and have a claim on net assets if the company is liquidated, after everyone else.

The company may pay out some or all of its net income as cash dividends, but it is never obliged to. It can even pay more than current income for a while, though that is not sustainable.

Votes cover major decisions: electing the board of directors, approving a merger or takeover, and choosing the external auditor. Voting usually happens at the annual meeting. Because most shareholders cannot attend, they vote by proxy, letting another shareholder, a representative or management cast their votes.

Statutory versus cumulative voting

Under statutory voting, each share carries one vote, cast separately for each seat. A holder with 250 shares can give at most 250 votes to each candidate. Whoever owns more than half the shares wins every seat.

Under cumulative voting, a holder's total votes equal shares owned × number of directors being elected, and they can be piled onto one candidate or split in any proportion. With 5 seats, the same 250 shares give 1,250 votes, all of which can go to a single candidate.

The point is minority representation. Concentrating every vote on one candidate lets a smaller holder win a seat that statutory voting would always hand to the majority.

Statutory vs cumulative voting
StatutoryCumulative
Votes per shareOne per share, for each seatOne per share × number of seats
Can votes be concentrated?NoYes, all on one candidate
Who benefitsMajority holderMinority holders
Typical resultMajority fills every seatMinority can win some seats
05,00010,000Votes3,0007,000Statutory12,0007,000CumulativeMinority: votes on its one candidateMajority: votes per candidate (4)
Kestrel Marine, 4 seats: the minority's 3,000 shares lose every seat under statutory voting, but cumulative voting lets it stack 12,000 votes on one candidate, beating the 7,000 the majority can give each of its four.

Share classes: votes and cash need not match

A company can issue several classes of common shares with different rights. A common design gives founders a class with extra votes (or gives the public a class with no votes), so the founders control the board while owning a minority of the economic interest.

Classes can also differ in liquidation priority, layer by layer. A typical ladder: both classes receive the first slice per share; the favoured class then receives the next slice alone; the other class gets a further slice; after that every share receives the same amount. Holders of the favoured class get a bigger part of a small distribution; once the ladder is used up, every share gets the same extra amount and the favoured class's head start stops growing.

Dividends, splits and conversion rights are spelled out per class. Shares of different classes often trade close in price when the only difference is voting; most trading tends to happen in the class with more shares outstanding.

Where one class controls the vote, a cumulative voting arrangement for the minority holders of that class would improve their board representation.

0%25%50%75%100%90%10%100%Share of equity47.4%52.6%100%Share of votesClass A (public, 1 vote)Class B (founders, 10 votes)
Arvo Software's founders own only 10% of the shares, but 10 votes per Class B share give them 52.6% of the votes: control without majority ownership.

Callable and putable common shares

Callable common shares give the issuer the right to buy the shares back from holders at a price set when they were first issued. The call price caps what the investor can earn.

Putable common shares give the holder the right to sell the shares back to the issuer at a preset price. That price works as a floor under the investor's outcome.

Both features also appear on preference shares, with the same rights and obligations. Because a call caps the investor's upside it lowers the share's value to holders, and a put, which sets a floor, raises it.

Who holds the option?
FeatureOption holderEffect for the investor
CallableIssuerUpside capped at the call price
PutableShareholderFloor at the put price

Formula

Cumulative voting: total votes
Votes=Shares owned×Directors to be elected\text{Votes} = \text{Shares owned} \times \text{Directors to be elected}

All of these votes may be cast for one candidate. Under statutory voting the holder has only 'shares owned' votes per seat.

Worked examples

Example 1 Counting votes

Elif owns 250 shares of Tarvo Oyj. Five directors are up for election. How many votes can she give one candidate under statutory voting and under cumulative voting?

Example 2 Can the minority win a seat?

Kestrel Marine has 10,000 shares. A founding family owns 7,000; an activist fund owns 3,000. Four directors are elected. How many seats can the fund secure under each voting system?

Example 3 Votes versus ownership in a dual-class company

Arvo Software has 9,000,000 Class A shares (1 vote each, held by the public) and 1,000,000 Class B shares (10 votes each, held by the founders). Both classes share dividends equally per share. What share of ownership and of votes do the founders have?

On the exam

Typical items: name the voting system from a description (one vote per share = statutory), count cumulative votes, say who benefits from cumulative voting, and identify who holds the option in callable or putable shares.

  • Confusing proxy voting (someone votes for you) with a voting system. Statutory and cumulative are the systems.
  • Forgetting to multiply by the number of seats under cumulative voting.
  • Thinking cumulative voting helps the majority. It exists to help minority holders.
  • Mixing up callable (issuer's option) and putable (holder's option).

Check yourself

  1. Q1The voting arrangement that gives one vote per share for each board seat is best described as:

  2. Q2An investor owns 400 shares. Six directors are being elected under cumulative voting. The maximum number of votes she can cast for one candidate is closest to:

  3. Q3Compared with statutory voting, cumulative voting most likely benefits:

  4. Q4Founders hold 2,000,000 Class B shares with 5 votes each; the public holds 8,000,000 Class A shares with 1 vote each. The founders' share of the votes is closest to:

  5. Q5A putable common share gives the right to:

0/5Check yourself

Answer the 5 questions: +10 XP for each one you get right first time.

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