Unit: Company law
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Login to Access(i) Explain the meaning of the phrase "cutting a melon".
(ii) State three reasons why a limited company might suspend issuing dividends.
(i) Describe four effects of a share transfer.
(ii) Explain two consequences of a forged transfer.
Preference shares are shares that provide holders with preferential rights to dividends and repayment of capital over ordinary shareholders. They can be classified as participating or non-participating, based on whether they share in surplus profits beyond the fixed preference dividend.
| Feature | Participating Preference Shares | Non-Participating Preference Shares |
| Right to Dividends | Entitled to fixed preferential dividend and additional dividends if the company declares surplus beyond ordinary dividends. | Entitled only to the fixed preferential dividend; no right to share in surplus profits. |
| Participation in Surplus | Shareholders participate in the distribution of remaining profits after ordinary and preference dividends are paid. | Shareholders do not participate in surplus profits; they only receive the stated dividend. |
| Capital Redemption | Rights on redemption are usually fixed as per terms of issue; may also have a bonus if specified. | Rights on redemption are limited to the nominal value or stated redemption price. |
| Risk Exposure | Higher potential reward due to participation in surplus; risk is lower than ordinary shares because of fixed dividend priority. | Lower potential reward; risk is moderate because only fixed dividends are guaranteed before ordinary shareholders. |
| Example | A company declares 10% fixed preference dividend, but also distributes additional 5% from profits; participating preference shareholders receive both. | A company declares 10% fixed preference dividend; non-participating preference shareholders receive only 10%, no extra. |
The main difference lies in sharing surplus profits:
Participating preference shares allow holders to benefit beyond the fixed dividend.
Non-participating preference shares limit holders to the fixed dividend only, without any additional participation.
Required:
(i) Highlight three legal consequences of contravening this provision.
(ii) Summarise two exceptions to the above statement.