What Is An Ordinary Share In Australia?

If you’re setting up or growing a company in Australia, you’ll quickly run into the term “ordinary shares.” They’re the most common type of share - but what do they actually mean for control, profits and decision-making in your business?

In this guide, we’ll break down what an ordinary share is, how it differs from other share classes, what rights usually attach to it, and how to issue and manage ordinary shares the right way. We’ll keep it practical and focused on what small business owners and startup founders need to know.

What Are Ordinary Shares In Australia?

An ordinary share represents a slice of ownership in a company. If you hold ordinary shares, you’re a member (shareholder) of the company and you typically have three core interests:

• Voting power on key decisions (for example, appointing directors or approving major transactions)
• A right to share in profits via dividends (if declared)
• A right to a share of residual assets if the company is wound up (after debts are paid)

In practice, ordinary shares are the baseline or “default” class many companies start with. They usually carry one vote per share, participate equally in dividends, and rank last on winding up (behind creditors and any preferential shareholders).

However, “ordinary” doesn’t mean “one-size-fits-all.” The exact rights of ordinary shares in your business can be tailored by your Company Constitution and any Shareholders Agreement. This is where you can fine-tune how votes work, whether there are pre-emptive rights on new issues, and how dividends are determined among classes.

Ordinary Shares vs Other Share Classes

While many small companies start with a single class of ordinary shares, you can create other classes to suit investment or control needs as you grow. If you’re considering alternatives or additions, it helps to understand the landscape.

• Different classes of shares: Companies can issue multiple classes, each with different voting, dividend or conversion rights. This flexibility can be useful if you want to bring on investors without diluting founder control, or reward key team members with performance-linked rights.
• Preference shares: These often carry priority to dividends and/or capital on winding up, and sometimes reduced or no voting rights. They can be structured to appeal to investors who want return priority without day-to-day control.

Compared to these alternatives, ordinary shares are straightforward and familiar to most investors and founders. They’re also flexible enough to work for early-stage ventures without adding unnecessary complexity. If you do add other classes later, ensure your documents clearly set out how those classes interact with your ordinary shares so there are no surprises.

What Rights Come With Ordinary Shares?

Ordinary shares commonly carry the following rights. Always check your Company Constitution and any shareholder agreements, as these rights can be adjusted by your documents (within the limits of the Corporations Act 2001 (Cth)).

1) Voting Rights

Ordinary shareholders typically have one vote per share. Voting rights let members influence critical matters such as appointing or removing directors, approving major transactions, and changing the company’s constitution.

2) Rights To Dividends

Ordinary shareholders participate in dividends if and when the board declares them. Dividends usually depend on profits, the company’s cash position, and directors’ judgment about reinvestment vs distribution. If there are multiple share classes, your documents should spell out how dividends are allocated across classes.

3) Rights On Winding Up

On a wind-up, ordinary shareholders rank behind creditors and any shareholders with preferential capital rights. Whatever remains (if anything) after those higher-priority claims is shared among ordinary shareholders, typically in proportion to their holdings.

4) Information Rights

Shareholders have certain statutory rights to receive notices of meetings, financial reports (for larger companies), and to ask questions at meetings. Your constitution and agreements can also set out additional information-sharing expectations to keep everyone aligned.

5) Pre-Emptive Rights (Often In Agreements)

Pre-emptive rights give existing shareholders a first right to buy new shares before they’re offered to outsiders (helpful for preventing unwanted dilution). These are often set in your Shareholders Agreement or constitution and are frequently applied to ordinary shares.

Tip: Not every right is automatic by law. Many ordinary share “customs” are actually driven by your documents. If you want a particular balance of control, dividends, or transfer rules, bake it into your constitution and shareholder terms upfront.

How Ordinary Shares Fit Into Your Company Documents

Ordinary shares don’t exist in a vacuum. The rules for how they work in your company sit across a few core documents. Getting these right early makes life much easier as you grow.

• Company Constitution: Sets out how the company operates, including share rights, director decision-making, issuing new shares, and meeting procedures. If you’re not using replaceable rules, a clear constitution tailored to your scenario is essential.
• Shareholders Agreement: A private contract between shareholders that deals with ownership, decision-making thresholds, pre-emptive rights, drag/tag provisions, dispute resolution and exits. It complements the constitution and is key to aligning expectations among founders and investors.

Together, these documents outline what “ordinary share” means in your business - including voting, dividend policies, transfer restrictions, and issue processes. If there’s ever a conflict, the Corporations Act and your constitution generally take precedence over a Shareholders Agreement as a matter of company law, so make sure they’re consistent.

Issuing Ordinary Shares: Practical Steps For Founders

Issuing ordinary shares sounds simple - but there are a few compliance and process steps to follow so your cap table stays clean and enforceable.

1) Confirm Authority To Issue

Check your constitution for any rules about board/shareholder approvals, pre-emptive rights, or price setting. Make sure you follow those steps (e.g. pass a directors’ resolution) before issuing new shares.

2) Agree The Terms With Subscribers

Record the commercial deal with investors or founders clearly. A Share Subscription Agreement sets out the price per share, number of ordinary shares being issued, conditions precedent (if any), warranties, and completion mechanics.

3) Consider Price And Dilution

Think about valuation and dilution - especially if you’re issuing new ordinary shares to investors. Pricing signals value and affects both current and future rounds. Even if it’s a founder top-up, ensure the rationale and board decision are well-documented.

4) Complete, Allot And Update The Register

On completion, allot the ordinary shares, issue receipts, and update your company share register. Keep your filings and records tidy - it saves headaches later (especially during due diligence or financing rounds).

5) Provide Evidence Of Ownership

While many companies maintain digital registers, it’s still common to provide share certificates or confirmations to shareholders as evidence of their ordinary shareholding, consistent with your processes and constitution.

6) Align The Cap Table And Internal Docs

Make sure your cap table, constitution, Shareholders Agreement and board minutes all reflect the new issue. Inconsistencies here can cause big problems when you try to raise capital or exit.

For startups, it’s also smart to think ahead about founder and team equity. If you’re allocating ordinary shares to co-founders or early employees, put a clear vesting and ownership framework in place from day one, using guidance like how to approach allocate shares in a startup.

Managing Ordinary Shares Over Time (Dividends, Transfers And Changes)

Once your ordinary shares are on issue, a few recurring scenarios tend to come up as you grow.

Paying Dividends On Ordinary Shares

Directors decide if and when to declare dividends to ordinary shareholders, subject to the Corporations Act (e.g. you must not pay a dividend if it would render the company insolvent). If you have multiple classes, spell out how dividends are shared to avoid disputes.

It’s common for early-stage companies to reinvest profits rather than declare dividends, then shift to distributions as cashflows stabilise. Align your dividend approach with your growth plan and funding needs.

Transferring Ordinary Shares

Shareholders may want to sell or transfer their ordinary shares to a new owner. Your documents should set clear rules for transferring shares, including any board approval requirements, restrictions, or pre-emptive rights for existing shareholders.

Transfers are a common flashpoint for disputes if the rules are vague. Keep your processes consistent, document decisions carefully, and make sure the share register reflects the current position at all times.

Changing Share Rights Or Creating New Classes

As your company matures, you might introduce new share classes to bring in investors or incentivise staff. If you do, update your constitution and Shareholders Agreement so everyone understands how those classes sit alongside your ordinary shares. This avoids accidental dilution of voting control or unexpected dividend priorities.

Valuation And Buy-Backs

Whether you’re buying back shares, facilitating founder exits, or restructuring ownership, you’ll likely need to think about valuation. There’s no one-size-fits-all method - and the right approach depends on stage, industry and purpose - but having a consistent framework helps keep negotiations constructive. For background on common approaches, see typical ways of valuing shares in a private company.

Governance Tips That Make Ordinary Shares Work Smoothly

• Keep your cap table and share register spotless - errors here cascade into bigger issues later.
• Document decisions and approvals around issues, transfers and dividends.
• Review your constitution and shareholder terms annually to ensure they still match how you actually operate.
• Communicate early with shareholders about material changes - surprises cause disputes.

Key Takeaways

• Ordinary shares are the foundational ownership units in most Australian companies, typically carrying voting rights, dividend participation and residual rights on winding up.
• Your Company Constitution and Shareholders Agreement define how ordinary shares work in your business - from voting and dividends to pre-emptive rights and transfers - so make sure they’re consistent and tailored.
• Issuing ordinary shares requires proper approvals, a clear commercial agreement (often via a Share Subscription Agreement), accurate allotment and careful record-keeping in the share register.
• Over time, you may layer other classes alongside ordinary shares or allow transfers; clear rules for rights, pricing and approvals will help avoid disputes.
• Dividends for ordinary shareholders are at directors’ discretion and must be lawful and aligned with your company’s cashflow and growth strategy.
• Clean governance and documentation around issues, transfers and valuation keep your cap table investor-ready and your business running smoothly.

If you’d like a consultation on structuring, issuing or managing ordinary shares in your company, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.