What is a Share?
A share is essentially a bundle of rights in a company, as defined by law or the Articles of Association. When a company is established, a decision is made regarding the number of shares the company will have and its registered capital (explained below). These shares are allocated to shareholders, who, at least in theory, invest money in exchange for them.
Each share grants its holder several rights with respect to the company. There are three primary rights:
Voting Rights
Every shareholder has the right to participate in votes at the company's general meeting and to cast their vote at their own discretion. Each share grants one vote at the general meeting. However, not all shares necessarily grant the same number of votes. There are different classes of shares (in private companies, there can even be Non-Voting Shares). In a publicly traded company, there is typically only one type of share.
Right to Receive Dividends
A dividend is a distribution of assets from the company to its shareholders. The board of directors decides whether to distribute dividends, and a shareholder cannot demand the distribution of dividends. However, if dividends are distributed, the shareholder is entitled to receive them.
This is subject to internal agreements—in some cases, certain shares have priority for dividend distribution, such as preferred shares, which grant a preference for receiving dividends. The decision to distribute dividends is at the board's discretion, based on the profitability test and the solvency test (i.e., whether the company is profitable and whether it will still be able to meet all its obligations after distributing the dividend).
Right to Residual Profits
If a decision is made to dissolve the company, the remaining profits after settling all debts constitute the residual profit. If any profit remains, shareholders are entitled to receive it. However, if the company has remaining debts after liquidation, shareholders are not personally liable for those debts, unless the corporate veil is pierced.
Understanding Share Capital
There are several key terms related to a company's share capital that need to be discussed:
Par Value
Each share is assigned a nominal value, which is arbitrarily set when the company is incorporated. There is no connection between the par value and the actual market value of the share.
Its significance is mainly accounting-related. When preparing the company's balance sheet, it has financial reporting implications (although today, companies can issue shares without a par value).
Authorized Share Capital
This refers to the maximum number of shares a company is allowed to issue, as stipulated in the Articles of Association. The authorized share capital can be increased—meaning the company can authorize more shares for issuance—by a resolution of the shareholders.
This is sometimes necessary when a company undergoes a share split or when founders incorporated the company without planning for later stages and received poor legal advice.
Issued and Outstanding Share Capital
This refers to the number of shares that the company has actually allocated to shareholders, meaning shares that are held by shareholders.
What is not included in this calculation? Options.
Options are essentially securities that represent a promise to receive company shares under certain conditions. Therefore, when the company grants options, they are not counted as part of the issued share capital until the option holder exercises them. Once exercised, the holder receives actual shares.
To account for the difference between shares already issued and other securities that could potentially convert into shares, investment transactions often use what is called a "fully diluted basis", which is the method used to calculate a company's valuation.
Paid-Up Capital
This refers to how much of the issued share capital has actually been paid for.
For example, if the payment for shares is scheduled to be made over two years, then those shares are considered issued, but they are not included in the paid-up capital until the payment is received.
Thus, in some cases, the paid-up capital is lower than the issued share capital. The difference between the paid-up capital and the par value represents the shareholders’ debt to the company, which may apply to a specific shareholder.
