What are Voting Shares? Definition, Example and Benefits

Key Highlights

• Voting shares grant shareholders the right to participate in the decisions and policies of a company. One share gives one vote to shareholders.

• Investors can vote in the election of the directors and other important matters of the company.

• The voting process involves an Annual General Meeting (AGM), where shareholders cast votes on resolutions.

Definition of Voting Shares

Voting shares are a kind of shares that allow shareholders to express their opinions on company matters. This includes the election of board members and other corporate issues. Common shares that a firm issues are typically referred to as voting shares. Each share has a value of one vote. Investors who hold voting shares get an ownership interest in the business.

How do Voting Shares Work?

After learning the voting shares definition, let’s see how they function. Stockholders possess equity ownership in a listed company when they buy its shares. There are basically two types of shares. These include voting shares and preferred shares.

Voting shares are also referred to as common shares. They provide preemptive rights. So, shareholders can retain ownership by buying more shares in future issuances. This suggests that shareholders have the option to purchase more shares of the firm before they are offered to the public or new investors.

Preferred shareholders have the first right to receive funds from the sale of assets when a company goes bankrupt. This sets them apart from voting shareholders. There are no rights for common shareholders to claim settlements in case of bankruptcy. In addition, common shares may not provide dividends. Or they may get lower dividends than preferred shareholders.

Example of Voting Shares

Assume that XYZ company issues 10,000 preference shares and 5,000 equity shares with voting rights. Let’s say you own 1,000 preference shares and 500 equity shares.

The company arranges the Annual General Meeting (AGM) and presents a list of resolutions for approval. It includes raising the company's total authorized share capital and appointing a director.

You own about 500 equity shares. So, according to the one-share-one-vote principle, you have 500 votes. You may use them to cast your vote at the AGM. However, your 1,000 preference shares do not grant you the right to cast a vote on any matter.

The resolutions will pass if the majority of shareholders vote in favour of them. This requires a vote of 51% or more shareholders. Otherwise, the proposed solutions shall be rejected.

Benefits of Voting Shares

Companies structure their share classes to include various types of shares. The aim is to ensure that a small minority of shareholders have the majority of the voting rights. This allows firms to grant voting rights to shareholders who are interested in the organization's long-term success.

Voting shares are a vital component of a company's share capital structure. They provide ownership, specific rights and advantages to their holders. They offer the following benefits, helping in the smooth operation of a company.

1. Voting shares give shareholders the power to influence decisions. It guarantees that the company takes care of their interests.

2. They give shareholders the authority to seek accountability from a firm.

3. Offer minority shareholders the authority to prevent more prominent shareholders from suppressing their interests.

4. Allow shareholders to provide suggestions that will ultimately benefit the firm.

5. Granting voting rights to a small group of shareholders prevents hostile takeover from shareholders who are not the company founders. It also ensures that no other firm purchases their shares at a premium.

6. Many shareholders lack the necessary industry or domain knowledge to influence corporate decisions. They may only stay invested in the company for a short time. Restricting voting rights gives decision-making power to stakeholders who prioritize company interests over short-term profits.

Disadvantages of Voting Shares

The following are some of the drawbacks of voting shares.

• Owners of voting shares are the last to get paid in case of bankruptcy. This is because preferred shareholders receive the compensation first.
• They do not offer guaranteed dividends since preferred shareholders must receive payments on a regular basis.
• It is a high-risk investment for shareholders who may lose their investments if the firm underperforms or files for bankruptcy.
• Unlike preferred shares, voting shares are restricted and not issued in large quantities. This makes it difficult for the general public to get them.
• A large-scale issuance of voting shares will dilute the ownership of existing shareholders. This results in less control and a potential decrease in the share price.

Conclusion

Voting shares offer shareholders the right to vote on crucial matters of the company. Investors have the authority to decide a company's management. They can vote for the appointment of the board of directors. They also get the power to approve or disapprove essential decisions such as acquisitions, mergers, and buybacks. However, there is also a significant risk because the investors may lose money if the firm goes bankrupt. So, investors must understand how voting shares function before buying them.