Investor Education Guide
Not all company shares come equal
This week’s article, part six of the Bermuda Investment Primer Series, is written in support of the “Own Your Share of Bermuda” sponsored by the Bermuda Stock Exchange (BSX) and the second article in The Royal Gazette series on publicly-traded Bermuda companies, about The Ascendant Group of Companies. (http://www.royalgazette.com/bermuda-stock-exchange/article/20170309/ascendant-supplying-power-for-century)
The Bermuda Stock Exchange has produced an Investor Education Guide in conjunction with the Series to help Bermuda investors. The guide provides information on the types of securities available on the BSX, and seeks to explain basic investment principles in a straightforward and simple manner. It also offers guidance on how to open a local trading account. The digital file of the guide is available on this webpage under the Related Media heading and at the BSX website at www.bsx.com.
Our Moneywise narrative this week uses a hypothetical Bermuda family who started a home-grown pizza business (in their kitchen) to illustrate the concepts of investing in themselves, Bermuda business incorporation processes, launching and profitably running a going concern, along with correlated discussions relative to investing and owning securities in Bermuda. Prior articles in this series can be found in search RG type in Martha Myron.
In this, part six, The MamaZina Pizzarina Ltd (MZEE) Bermuda Business finally incorporates, elects a board of directors, sets the number of voting members to constitute a quorum, then dictates a set of byelaws that will work for the present and the future, allocates the number (and kind) of shares that each family member will own or other non-related holder in the articles of association, defines an equitable succession plan for the business, places a ceiling on the debt level the business can carry, and distinguishes / reviews other matters.
The MZEE family meets with their lawyer, disputes, but finally agrees to parity for all members involved in the business. While not everyone is happy with the share allocation and dividend outcome, however, it is written into their company charter.
Kinds of shares: most businesses, but not all, eventually incorporate, issuing shares to the stockholders in the process. The owner(s) of company shares can be a real assorted lot — from a single individual to a small group of people, partnerships, other companies, trusts, foundations, and in the real big world, millions of people who can own tiny pieces (shares) of publicly-traded incorporated companies.
Shares can be classified in the examples below, and while this is not the exhaustive list, ** see the Company Law Club UK link at end of article, these are probably the most common. In general, the same share classifications can exist in Bermuda, but, it is always wise to review (or have your corporate attorney advise) the current Bermuda Companies Act 1981 with amendments.
?Ordinary (common shares): most small companies only have one share class. This is it, complete with attached voting rights. Share dividends (on common stock) are paid in proportion to the percentage ownership of the shares owned. Example: one share pays an annual dividend of $4.00. Simple math = 100 shares X $4 = $400.
And a very real caveat for you, readers. Dividends are not a God-given right. Dividend amounts are decided upon after the end of each operating year by the board of directors and then, declared to the shareholders of record.
Dividends may be suspended or not paid at all if operating results, recessionary pressures, or other major financial events require cash reserves. Here in Bermuda, those who own(ed) local stocks during the Great Bermuda Recession know all too well what it means to have dividends cut or discontinued.
Preference shares: a different kettle of fish, completely. Yes, they are shares, but they act much more like bonds — we will be covering bonds in part seven.
Named “preferred” because they have a right (ahead of common shares) to a fixed dividend amount — usually, a significantly higher return than common shares, too. Preference shareholders, generally, have no voting rights in the company, and a short shelf life. They can be called back (redeemed without your consent) — on a certain date at a certain price, often no more than two to four years after issuance and depending upon the issuer’s terms and conditions.
This callback feature happens such as when interest rates drop below the rate of return on the preference shares, or the company has had very profitable reports. Recently, Butterfield Bank redeemed (two years early) all preference shares issued during its finance restructuring in 2009.
Alphabet shares, ie A shares, B shares, etc, provide for different dividend payouts than ordinary common stock.
Management shares: provide for extra dividends or additional shares in order to keep company control with top management.
At this point, I am sure readers are wondering why the heck all this company lingo is interjected into a discussion about stocks and investing.
Little seeds germinate large plants. Tiny, small businesses that incorporate do grow, in many cases astronomically. Incorporation generates shares and shareholder owners. An initial public offering generates many, many more shares that offer for sale a right of ownership to the general public — making anyone interested in owning a piece of the rock, an owner too.
The Royal Gazette featured the Bermuda company of the week with an excellent article by Raymond Hainey — the old Lack-a-Light company. The well-documented history of Belco is on the company website.
“In 1904, through the vision of George Marshall Allen of New Jersey and several prominent Bermudians, the Bermuda Electric Light, Power & Traction Company was incorporated. Operating from a converted saw mill on East Broadway in Hamilton, the company installed its first generating unit, a 50 kilowatt suction gas engine, in 1907. Demand for electricity was almost nonexistent. In fact, during that first year of business, BELP&T’s electricity was used only by the company itself to light an advertising sign on the premises.” ( https://belco.bm/index.php/about-us/history-of-belco )
Belco later in its operations became a publicly-owned company (BSX ticker: AGL.BH). Ascendant Group Ltd is the latest name change, reflecting the diversity of the underlying company holdings.
All local companies’ publicly-owned and traded information is available in depth on the Bermuda Stock Exchange website ( www.bsx.com ). Consider exploring the best offshore stock exchange in the world.
Next: MZEE family issues mean share allocation is not going to be equal across the board. MZEE must keep control. George has a domineering US spouse. Juliana cannot afford her capital contribution. The $25,000 loans from the cousin and friend is due. How do you think they structured the share allocations?
** Classes of shares: http://www.companylawclub.co.uk/classes-of-shares
Martha Harris Myron CPA PFS JSM: Masters of Law — International Tax and Financial Services. Pondstraddler Life™, financial perspectives for Bermuda islanders’ domestic affairs and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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