Preference Shares: An Explainer

Just like the Hemsworth brothers, not all shares are created equal, with preference shares being the ‘Chris’ of shares in terms of their favourability among shareholders. They are quite complex so you should know all about them before deciding whether they are right for your company.

What are they?

Preference shares give the shareholder a priority to dividends and/or company assets in liquidation compared to other shareholders. This priority means that preference shareholders have a better claim to company assets. Moreover, they can give shareholders greater dividends than other shareholders. They also come with a liquidation preference, which pre-determines the amount that they receive in liquidation.

Benefits for a company

Preference shares are usually more popular than ordinary shares which allows you to raise capital more quickly. Furthermore, they often have reduced voting rights. This means you are less bound to shareholder control and influence.

Benefits for shareholders

As they allow for more security in case a company goes into liquidation,
shareholders may be more inclined towards them. Furthermore, they often represent a greater financial return, making them popular with investors who wish to have dividend income.

How do I create preference shares?

To create preference shares, companies will issue a prospectus detailing the essential information about them. You will still need to make a shareholder’s agreement and provide ASIC with relevant information. For more about shareholder’s agreements, click here. If you are a public company, it will be possible for investors to buy your shares on the ASX.

Different Types of Preference Shares

There are several different types of preference shares that change the rights shareholders acquire by virtue of their shares. It is important to know the difference between them, to determine the sort of shares that you should be offering and your obligations to your different types of shareholders.

  • Convertible v Non Convertible: Convertible shares are shares that can be changed into ordinary shares by the shareholder.
  • Redeemable v Non. Redeemable: Redeemable shares are those that can be bought by the company at their or the shareholder’s discretion providing certain conditions are met.
  • Participating v Non-Participating: Participating shares are those that give shareholders the right to surplus assets once other shareholders are paid back upon company termination. A point to note, is that non-participating shares are the standard in the Australian market.

Conclusion

Therefore preference shares offer shareholders different rights as compared to ordinary shareholders. Furthermore, they can benefit companies by your shares more desirable to prospective investors. If considering them, you should get in contact with a financial lawyer for legal advice.

Thinking about preference shares? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

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