If you wish to invest in preference shares, you must first understand the rights and terms of preference shares related to the company. In general, Section 2(1) of the Companies Act 2016 (“CA 2016”) defines the term of “Preference Shares” as an issuance of share which does not entitle the holder to the right of voting on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend or redemption or winding up or otherwise.
Preference shares also may be called as “Special Share” or “Class A share” or whatsoever name preferred as long as the class of share has its own redemption features and follows the redemption provisions in Section 72 of the CA 2016.
There are several types of Preference Shares (depends on the Constitution of the Company), e.g:-
1) Cumulative/Non-Cumulative
2) Redeemable/Non-Redeemable
3) Participative/Non-Participative
4) Convertible/Non-Convertible
1) Cumulative/Non-Cumulative
Cumulative dividend is a share which entitles the holder the right to a dividend. If the dividend is not paid in 1 year through lack of profits, it will accumulate until the profits are sufficient. In general, all preference shares are presumed to have cumulative dividend unless the Constitution of the Company stated otherwise. For Non-Cumulative dividend, the lost dividend will not be carried forward in subsequent years as the dividend is only entitled at specified rate of dividend declared.
2) Redeemable/Non-Redeemable
Section 72(2) of the CA 2016 states that subject to the Constitution, a company may issue a preference share which are liable to be redeemed in accordance with the Constitution. It is redeemable if only it is fully paid up out of profits, a fresh issue of shares or capital of the company. Such redemption will be effected according to
the terms and manner provided by the Constitution. If the Constitution states otherwise, the preference shares issued will not carry the right for redemption and will be returned to the holder when the Company goes for a capital reduction to repay the preference capital or if the Company winds up and capital is returned. Hence, the holder of the Preference Shares is not entitled to request for redemption of the Preference Shares.
3) Participative/Non-Participative
Usually, Preference Shares are deemed as a Non-Participative unless the Constitution of the Company stated otherwise. If it is stated, the holder will carry the right to a dividend at a nominated rate together with a right to participate in further distribution if there are remaining of surplus of profits. The holder also may carry the right to participate with the ordinary shareholder in any surplus assets.
4) Convertible/Non-Convertible
Every Constitution of the Company must provide provisions for the conversion of Preference Shares into any other shares if the company intends to do so. Apart from that, the Preference Shares are deemed to be issued without conversion rights and such shares will then be redeemed or the preference share capital will be reduced.
