Introduction

Shares are defined as units of ownership interest in a company, conferring various rights and
privileges upon the holder. These rights typically include the ability to vote at shareholder
meetings, the right to receive dividends, and a claim on the company’s assets in the event of
liquidation.

The regulation of shares is critical in establishing the framework within which companies
operate and interact with their shareholders. In Uganda, the Companies Act of 2012 serves as
the primary legal instrument governing the issuance, transfer, and management of shares. This
legislation outlines the different classes of shares, the rights associated with each type, and the
obligations of both the company and its shareholders.

Understanding shares from a legal perspective is essential for comprehending the dynamics of
corporate governance and the protection of shareholder rights. Various judicial interpretations
and court cases further shape the legal landscape surrounding shares, offering insights into how
laws are applied in real-world scenarios. Notable cases have established significant precedents
regarding shareholder rights, the responsibilities of directors, and the nature of corporate actions.

Types of Shares

1. Ordinary Shares

Section 63 of the Companies Act defines ordinary shares and states that they carry voting rights.

Ordinary shares, also known as common shares, are the most widely held type of equity shares in
a company. Shareholders who hold ordinary shares have voting rights, allowing them to
participate in the decision-making processes at annual general meetings (AGMs) and other
shareholder meetings. Section 77 emphasizes the entitlement of ordinary shareholders to receive
dividends after preference shareholders have been paid. They are entitled to dividends, which are
paid at the discretion of the board of directors. In the event of liquidation, ordinary shareholders
are the last to be paid after creditors and preference shareholders.

Example: If a company declares a dividend of UGX 100 per ordinary share, a shareholder
holding 1,000 ordinary shares would receive UGX 100,000. However, if the company is
liquidated, ordinary shareholders may only receive a portion of the remaining assets after all
debts and obligations have been settled.

In Eagle Air Limited v. Kyambadde (2019), the court affirmed the rights of ordinary
shareholders to vote and be involved in the governance of the company. The ruling reinforced
the principle that the majority of shareholders can make decisions that affect all shareholders, but
minority shareholders still have protection under the law.

Characteristics:

 Dividend contingency: Deferred shareholders may have to wait years before receiving
dividends, depending on the company’s performance.

 Long-term commitment: These shares are often issued to company founders or senior
management as a reward for long-term performance.

 Low initial value: Since these shares are riskier and dependent on the company's
success, they typically have a lower initial value but potentially higher returns if the
company grows.

Advantages:

 Potential for high returns: When the company performs well and surpasses profit
targets, deferred shareholders can receive significant dividends.

 Incentivizing management: Issuing deferred shares to senior management can align

their goals with the long-term success of the company.

Disadvantages:

 Risk of no dividends: If the company never achieves the required profitability, deferred
shareholders may never receive dividends.

 Subordinated claims: Deferred shareholders are lower in priority than other

shareholders, which makes these shares riskier.

2. Preference Shares

Preference Shares
Preference shares are a class of shares that provide shareholders with preferential rights over
ordinary shareholders, particularly in relation to the payment of dividends and the distribution of
assets during liquidation. These shares are often structured to appeal to investors looking for
stable income with less exposure to risk than ordinary shares. Preference shareholders generally
have a fixed dividend rate, and in the event of liquidation, they have a claim on the company's
assets before ordinary shareholders, though they typically do not have voting rights.

Legal Framework in Uganda (Companies Act)

Section 61 of the Companies Act: Defines preference shares and outlines their key
characteristics, such as preferential treatment in dividends and liquidation.

Section 64: States the rights of preference shareholders, emphasizing their priority in receiving
dividends and their claims on assets before ordinary shareholders during liquidation.

Section 78: Allows companies to issue different classes of preference shares, each with varied
rights and privileges, such as dividend rates, convertibility into ordinary shares, and redemption
rights.

Categories of Preference Shares

Cumulative Preference Shares

Cumulative preference shares provide shareholders the right to accumulate unpaid dividends. If
the company is unable to pay dividends in a particular year due to insufficient profits, these
unpaid dividends are carried forward and must be paid in future years before any dividends can
be distributed to ordinary shareholders.

Example: Suppose Cipla Quality Chemical Industries in Uganda issues 1,000 cumulative
preference shares with a dividend rate of 8%. If the company fails to pay dividends in 2023 due
to low profitability, the unpaid dividends will accumulate and must be paid in 2024 (or
subsequent years) before any dividends are paid to ordinary shareholders. If the dividends for
2023 and 2024 are both due, the company will pay UGX 160 (UGX 80 per share per year) to
preference shareholders before paying ordinary shareholders.

Non-Cumulative Preference Shares

Non-cumulative preference shares do not allow shareholders to accumulate unpaid dividends. If
the company cannot pay dividends in a particular year, preference shareholders lose their right to
that year's dividend. However, they will still receive dividends in future years if the company is
profitable.

Example: If Uganda Breweries Ltd issues 500 non-cumulative preference shares at a 6%

dividend rate, and the company fails to pay dividends in 2023, shareholders lose their right to
claim those dividends. However, if the company is profitable in 2024, preference shareholders
will receive their dividends for that year but not for 2023.

Redeemable Preference Shares

Redeemable preference shares give the issuing company the right (but not the obligation) to
repurchase (redeem) the shares at a future date or after a specified period. These shares can be
attractive to companies looking to raise temporary capital or investors seeking more security than
ordinary shares provide.

Example: MTN Uganda issues 2,000 redeemable preference shares, with a provision that the
company can buy back the shares after 10 years. In 2033, MTN decides to repurchase the shares
at the predetermined price, providing shareholders with both their original investment and any
accrued dividends.

Convertible Preference Shares

Convertible preference shares provide shareholders with the option to convert their preference
shares into ordinary shares after a specified period or under specific conditions. This allows
shareholders to benefit from potential capital appreciation if the company performs well and its
ordinary shares increase in value.

Example: Bank of Uganda issues 1,500 convertible preference shares that can be converted into
ordinary shares after 5 years. If the company grows significantly during this period and its
ordinary shares appreciate in value, shareholders can convert their preference shares into
ordinary shares to benefit from the higher share price.

Characteristics of Preference Shares

  Fixed Dividends: Preference shareholders receive dividends at a fixed rate, making these
shares less volatile than ordinary shares.

 Priority in Dividend Payments: Preference shareholders must receive their dividends

before any dividends are paid to ordinary shareholders.

 Preference in Liquidation: In the event of liquidation, preference shareholders have a

higher claim on the company’s assets than ordinary shareholders, but they rank below
debt holders.

 Non-Voting Rights: Typically, preference shareholders do not have voting rights in

company meetings, except in cases where their rights are affected (e.g., changes to their
dividend terms or the issuance of additional preference shares).

Advantages of Preference Shares:

 Stable Returns: Preference shares provide a steady stream of income through fixed
dividend payments, making them attractive to risk-averse investors.

 Priority in Payments: Preference shareholders have a higher claim on dividends and

company assets compared to ordinary shareholders, reducing their financial risk in the
event of poor company performance or liquidation.

 Convertible and Redeemable Options: These additional features (such as the ability to
convert into ordinary shares or redeem the shares at a later date) provide flexibility and
potential for capital appreciation.

Disadvantages of Preference Shares:

 Limited Voting Rights: Preference shareholders typically do not have voting rights,
limiting their influence over the company’s governance.

 Lower Capital Growth Potential: Unlike ordinary shares, which can appreciate
significantly in value if the company grows, preference shares provide a more limited
potential for capital appreciation.
  Fixed Dividends Only: Preference shareholders only receive fixed dividends, even if the
company performs exceptionally well and ordinary shareholders receive higher
dividends.

Example: A company like Mukwano Group issues 1,000 preference shares with an 8%
dividend rate. If the company makes a profit, preference shareholders receive UGX 80 per share
annually before any dividends are distributed to ordinary shareholders. This predictable dividend
payout makes preference shares an appealing option for investors seeking stable income, even
though they may not have voting rights in company meetings.

In Stanbic Bank Uganda Limited v. Ayeh (2017), the court addressed a dispute regarding
dividend payments to preference shareholders. The ruling emphasized that preference
shareholders must receive their entitled dividends before ordinary shareholders, illustrating the
legal precedence of preference rights in corporate governance.

3. Redeemable Shares

Section 65 of the Companies Act provides for the issuance of redeemable shares, specifying that
the terms of redemption must be outlined in the company's articles of association.

Section 66 mandates that redeemable shares can only be redeemed out of profits or the proceeds
of a fresh issue of shares. Redeemable shares are a class of shares that a company can buy back
from shareholders at a predetermined price and date. This mechanism provides companies with
flexibility in managing their capital structure and allows them to return capital to shareholders.
Redeemable shares can be either ordinary or preference shares, and the terms of redemption must
be clearly outlined in the company’s articles of association.

Example: A company issues redeemable preference shares that can be redeemed after five years
at UGX 1,200 per share. After five years, if the company decides to buy back the shares, it must
pay the agreed redemption price to the shareholders.

In Kampala Cement Company Limited v. Nyanzi (2020), the court ruled on the process of
redeeming shares, highlighting that the company must follow the stipulated terms of redemption
in its articles of association and ensure proper communication with shareholders about the
redemption process.

4. Non-voting Shares

Section 68 of the Companies Act allows for the issuance of non-voting shares, stating that
companies can create shares without voting rights in their articles of association.

Section 79 indicates that non-voting shares may have rights to dividends but lack participation in
governance. Non-voting shares are shares that do not grant the holder voting rights in company
decisions. These shares can be either ordinary or preference shares, and they are often issued to
raise capital without giving up control of the company. Non-voting shareholders may receive
dividends but lack the influence to participate in governance.

Example: A company might issue non-voting ordinary shares to raise capital for expansion.
These shares might be sold at a lower price compared to voting shares, allowing investors who
are less concerned about governance to invest in the company.

In Re: A Company (1985), the court examined the rights of non-voting shareholders regarding
dividend payments and their legal standing in company matters. The court clarified that while
non-voting shareholders lack governance rights, they are entitled to equitable treatment
concerning dividends.

5. Deferred Shares

Deferred shares are a type of share that only receives dividends after certain conditions are met,
typically after all other classes of shares have been paid. Section 79 allows for the creation of
various classes of shares with different rights, and Section 80 discusses the conversion of shares.

These shares usually have lower priority when it comes to dividend payments and may have
limited or no voting rights.

Example: A company may issue deferred shares to its directors as part of a long-term incentive
plan. These shares would only pay dividends after ordinary and preference shareholders have
received their due dividends for a set period.
In Re: Sphinx Limited (1998), the court deliberated on the rights associated with deferred
shares, determining that the terms of issuance and the conditions for dividend payments must be
clear and compliant with the Companies Act.

Conclusion

In conclusion, shares play a pivotal role in the structure and governance of companies, serving as
essential instruments for establishing ownership and defining the rights of shareholders within
the corporate framework. The Companies Act 2012 of Uganda provides a comprehensive legal
foundation for the various types of shares, including ordinary shares, preference shares,
redeemable shares, and non-voting shares, each with distinct characteristics and implications for
shareholders and the company itself. Ordinary shares empower holders with voting rights and the
potential for dividends, while preference shares grant priority in dividend payments and asset
distribution, thereby offering a safety net for investors. Redeemable shares introduce flexibility
for companies to manage their capital, allowing for the buyback of shares under specified
conditions, while non-voting shares provide a means to raise capital without relinquishing
control over governance. Judicial interpretations and court cases further illuminate the legal
landscape surrounding shares, underscoring the protection of shareholder rights and the
obligations of directors.
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Eagle Air Limited v. Kyambadde (2019). High Court of Uganda.

Kampala Cement Company Limited v. Nyanzi (2020). High Court of Uganda.

Keenan, D., & Riches, S. (2019). Business law (11th ed.). Pearson.

Salomon v. Salomon & Co. Ltd (1897). AC 22 (HL). Retrieved from

Stanbic Bank Uganda Limited v. Ayeh (2017). High Court of Uganda.