Shares and other securities
Under all systems of law a partner may assign his share or interest in a partnership to anyone he wishes unless the partnership agreement forbids this, but the assignment does not make the assignee a partner unless all the other partners agree. If they do not, the assignee is merely entitled to receive the financial benefits attached to the share or interest without being able to take part in the management of the firm, but neither is he personally liable for the debts of the firm.
The shares of a company are quite different. In the first place, they are freely transferable unless the company's constitution imposes restrictions on their transfer or, in French and Belgian law, unless the company is a private one, in which case transfers require the consent of the holders of three-quarters of the company's issued shares. The constitution of an English private company must always restrict the transfer of its shares for the company to qualify as private. The restriction is usually that the directors may refuse to register a transfer for any of several reasons or that the other shareholders shall have the right to buy the shares at a fair price when their holder wishes to sell. In American law similar restrictions may be imposed, but unreasonable restrictions are disallowed by the courts. According to French and German law, the transfer of shares in public companies may be restricted only by being made subject to the consent of the board of directors or of the management board, but under French law if the directors do not find an alternative purchaser at a fair price within three months their consent is considered as given.
Limited liability
The second significant difference between share holding and partnership is that shares in a company do not expose the holder to unlimited liability in the way that a partner (other than a limited one) is held liable for the debts of the firm. Under all systems of law, except those of Belgium and some U.S. states, all shares must have a nominal value expressed in money terms, such as $10, £1, DM 50, or Fr 100, the latter two being the minimum permissible under German and French law, respectively. A company may issue shares for a price greater than this nominal value (the excess being known as a share premium), but it generally cannot issue them for less. Any part of that nominal value and the share premium that has not so far been paid is the measure of the shareholder's maximum liability to contribute if the company becomes insolvent. If shares are issued without a nominal value (no par value shares), the subscription price is fixed by the directors and is the measure of the shareholder's maximum liability to contribute. Usually the subscription price of shares is paid to the company fairly soon after they are issued. The period for payment of all the installments is rarely more than a year in common-law countries, and it is not uncommon for the whole subscription price to be payable when the shares are issued. The actual subscription price is influenced by market considerations, such as the company's profit record and prospects, and by the market value of the company's existing shares. Although directors have a duty to obtain the best subscription price possible, they can offer new shares to existing shareholders at favourable prices, and those shareholders can benefit either by subscribing for the new shares or by selling their subscription rights to other persons. Under European legislation, directors are bound to offer new shares to existing shareholders in the first place unless they explicitly forgo their preemptive rights. In most U.S. states (but not in the United Kingdom), such preemptive rights are implied if the new shares belong to the same class as existing shares, but the rights may be negated by the company's constitution.
Dividends
The third difference between share holding and partnerships is that a partner is automatically entitled to a share of the profits of the firm as soon as they are ascertained, but a shareholder is entitled to a dividend out of the company's profits only when it has been declared. Under English law, dividends are usually declared at annual general meetings of shareholders, though the company's constitution usually provides that the shareholders cannot declare higher dividends than the directors recommend. Under American law, dividends are usually declared by the directors, and, if shareholders consider, in view of the company's profits, that too small a dividend has been paid, they may apply to the court to direct payment of a reasonable dividend. German law similarly protects shareholders of public companies against niggardly dividends by giving the annual general meeting power to dispose as it wishes of at least half the profit shown by the company's annual accounts before making transfers to reserve. For the same object, Swedish law empowers the holders of 10 percent of a company's shares to require at least one-fifth of its accumulated profits and reserves to be distributed as a dividend, provided that the total distribution does not exceed one-half of the profits of its last financial year. Thus, most national law recognizes potential conflict of interest between directors and shareholders.
Classes of shares
Companies may issue shares of different classes, the commonest classes being ordinary and preference, or, in American terminology, common and preferred shares. Preference shares are so called because they are entitled by the terms on which they are issued to payment of a dividend of a fixed amount (usually expressed as a percentage of their nominal value) before any dividend is paid to the ordinary shareholders. In the case of cumulative preference shares, any unpaid part of a year's dividend is carried forward and added to the next year's dividend and so on until the arrears of preference dividend are paid off. The accumulation of arrears of preference dividend depreciates the value of the ordinary shares, whose holders cannot be paid a dividend until the arrears of preference dividend have been paid. Consequently, it has been common in the United States (but not in the United Kingdom) for companies to issue noncumulative preference shares, giving their holders the right to a fixed preferential dividend each year if the company's profits are sufficient to pay it but limiting the dividend to the amount of the profits of the year if they are insufficient to pay the preference dividend in full. Preference shares are not common in Europe, but under German and Italian law they have the distinction of being the only kind of shares that can be issued without voting rights in general meetings, all other shares carrying voting rights proportionate to their nominal value by law.
