Preferred Shares—The Most Comprehensive Analysis

One scenario is when a company holds a vote on major matters that directly affect the interests of preferred shareholders; in such cases, preferred shareholders possess voting rights, and these votes are conducted separately from those of common shareholders. This type of voting right may be termed the preferred shareholders’ ‘inherent voting rights.’ According to the ‘Guiding Opinions,’ the following five matters require not only approval by more than two-thirds of the voting rights held by attending common shareholders, but also approval by more than two-thirds of the voting rights held by attending preferred shareholders: (1) amending provisions of the company’s articles of association relating to preferred shares; (2) reducing the company’s registered capital by more than ten percent, either in a single instance or cumulatively; (3) merger, division, dissolution, or change in corporate form; (4) issuance of preferred shares; and (5) other circumstances stipulated in the company’s articles of association. Another scenario arises when the company fails to distribute dividends to preferred shareholders as agreed for an extended period, causing preferred shareholders’ voting rights to be restored to parity with those of common shareholders—enabling them to participate in corporate decision-making and vote alongside common shareholders. Such voting rights may be termed ‘restored voting rights.’ The ‘Guiding Opinions’ stipulate that if the company fails to pay preferred dividends as agreed for three consecutive fiscal years or for two consecutive fiscal years, preferred shareholders may exercise the voting rights prescribed in the company’s articles of association. It should be noted that ‘restored voting rights’ are not permanent: once the company fully pays all outstanding preferred dividends, preferred shareholders forfeit these voting rights. II. Issuance and Trading of Preferred Shares 8. Which companies may conduct public offerings? According to the ‘Measures,’ a listed company may publicly offer preferred shares only if it satisfies one of the following conditions: (i) its common shares are constituent stocks of the SSE 50 Index; (ii) it uses publicly offered preferred shares as consideration to acquire or absorb-merge another listed company; or (iii) it repurchases common shares for the purpose of reducing registered capital and, in doing so, may use publicly offered preferred shares as payment, or—after completing the share repurchase plan—may publicly offer preferred shares up to the total amount of the capital reduction. Once approved by the CSRC for a public offering of preferred shares, a listed company remains eligible to proceed with the offering even if its common shares subsequently cease to be components of the SSE 50 Index. 9. Why is the scope of public offerings limited to these three scenarios? Restricting the scope of public offerings is primarily motivated by the following considerations: First, market understanding of the risk-return profile of preferred shares requires time to mature. Although preferred shares enjoy advantages over common shares—such as priority in dividend distribution and residual asset claims—they generally cannot participate in the growth upside of the issuing company. Compared with bonds, preferred shares lack a fixed maturity date, and in bankruptcy liquidation, their claim rank falls behind that of bondholders. Moreover, with respect to dividend receipt, preferred shareholders face the risk of receiving no dividends if the company’s operating performance deteriorates. Thus, preferred shares are not risk-free investments. Second, preferred shares involve complex corporate governance arrangements, requiring issuers to maintain sound and well-established corporate governance structures. Therefore, to ensure a prudent and stable launch of the preferred-share pilot program—and to protect the interests of minority investors—it is necessary to restrict the scope of entities eligible for public offerings, beginning with relatively stable, well-governed SSE 50 constituent companies. Additionally, to facilitate M&A and restructuring activities and encourage value-based management, the ‘Measures’ designate companies using publicly offered preferred shares as acquisition or absorption-merger consideration, or those repurchasing common shares and issuing preferred shares, as eligible public offering entities.

What Do Preferred Shares Mean for Enterprises?

In the vast ocean of corporate financing, preferred shares resemble a distinctive vessel—combining the stability of bonds with the flexibility of common stock. Yet for many, preferred shares remain a mysterious domain. Here, I will delve deeply into the concrete significance of preferred shares for enterprises, particularly their unique role within the financing structure of Chinese companies. What Are Preferred Shares? Preferred shares constitute a hybrid equity instrument situated between bonds and common stock. They typically carry a fixed dividend rate and enjoy seniority over common shareholders in corporate liquidation. In short, preferred shareholders hold a ‘preferred’ position both in profit distribution and in the distribution of residual assets upon liquidation. Motivations for Enterprises to Issue Preferred Shares 1. Financing Flexibility For enterprises, issuing preferred shares represents a flexible means of raising capital. Unlike bond issuance, preferred shares do not increase corporate debt burdens and therefore do not impact the company’s debt-to-equity ratio—a critical advantage for firms seeking to preserve financial flexibility. 2. Cost Efficiency Although the dividend rate on preferred shares is typically higher than that on common shares, their overall cost often proves lower than the interest cost of long-term debt. This is because dividends are generally calculated pre-tax, thereby reducing the effective cost. 3. Stability of Control Rights Preferred shares usually carry no voting rights, meaning their issuance enables companies to raise funds without diluting existing shareholders’ control. This factor is especially important for founders and key shareholders. Application of Preferred Shares in Chinese Enterprises In China, preferred shares are particularly prevalent in capital-intensive industries such as real estate and manufacturing.

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