Shareholders holding preferred shares are investors who possess a special class of shares in a company, entitling them to certain benefits and advantages compared to ordinary shareholders. Preferred shares are typically associated with rights such as preferential dividends or priority in the distribution of assets upon liquidation of the company. The following article, prepared by NPLaw, provides insights into the legal aspects concerning shareholders holding preferred shares.
I. Understanding shareholders holding preferred shares
Shareholders holding preferred shares are those who own a class of shares that grants them special rights not afforded to ordinary shareholders. Preferred shares often obtain entitlements such as the right to receive fixed annual dividends, priority in the distribution of profits before ordinary shareholders, and the right to a return of capital prior to ordinary shareholders in the case of the company’s dissolution.
However, shareholders holding preferred shares typically have no voting rights or are subject to restrictions on voting rights at general meetings of shareholders. This type of shareholding is most suitable for investors seeking stable returns and who are less concerned with participating in the management of the company.
II. Legal provisions on shareholders holding preferred shares
1. Who are shareholders holding preferred shares?
Shareholders holding preferred shares are individuals or entities that own classes of shares conferring special rights beyond those attached to ordinary shares. These include: preferred voting shares, preferred dividend shares, redeemable preferred shares, and other classes of preferred shares as stipulated in the company’s Charter.
Depending on the type of preferred shares:
- Preferred voting shares may only be held by organizations authorized by the Government or by founding shareholders, and only within a limited period.
- Preferred dividend shares and redeemable preferred shares may be held by any investor, whether an individual or an organization, provided the company issues such shares.
2. Conditions for becoming a shareholder holding preferred shares
Pursuant to Articles 116, 117, and 118 of the Law on Enterprise 2020, the conditions for becoming a shareholder holding preferred shares depend on the type of preferred shares, as follows:
- Preferred voting shares:
+ Only being held by Government-authorized organizations and founding shareholders.
+ For founding shareholders, the preferential voting right is valid for only three (03) years from the date of issuance of the Enterprise Registration Certificate.
+ Upon expiry, preferred voting shares shall automatically convert into ordinary shares.
- Preferred dividend shares:
+ No restrictions on eligible holders; any investor may hold such shares if issued by the company.
+ The holder is entitled to receive dividends higher or more stable than those paid on ordinary shares, regardless of the company’s business performance.
- Redeemable preferred shares:
+ The holder is entitled to demand the company redeem their contributed capital, in accordance with the conditions specified in the share certificate and the company’s Charter.
+ Such shares are suitable for investors seeking to withdraw capital at a predetermined time or under specific contractual arrangements.
In summary, the conditions for becoming a shareholder holding preferred shares vary by type, with preferred voting shares subject to the strictest restrictions.
3. Rights and obligations of shareholders holding preferred shares
Rights of shareholders holding preferred shares:
- Preferred voting shares (Clause 2, Article 116, Law on Enterprise 2020):
+ Being entitled to vote on matters under the authority of the General Meeting of Shareholders.
+ Obtaining other rights similar to ordinary shareholders, except that preferred voting shares may not be transferred to others.
- Preferred dividend shares (Clause 2, Article 117, Law on Enterprise 2020):
+ Being entitled to receive fixed dividends regardless of the company’s business performance (at the rate specified in the share certificate).
+ Being entitled to return assets corresponding to their shareholding upon dissolution or bankruptcy.
+ Obtaining other rights similar to ordinary shareholders, without voting rights, right to attend general meetings, and right to nominate candidates to the Board of Directors or Supervisory Board.
- Redeemable preferred shares (Article 118, Law on Enterprise 2020):
+ Being entitled to request redemption of their shares at any time or within a specific period stated in the share certificate.
+ Obtaining rights similar to ordinary shareholders, without voting rights, right to attend general meetings, and right to nominate candidates to the Board of Directors or Supervisory Board.
Obligations of shareholders holding preferred shares (Article 119, Law on Enterprise 2020):
- Fully and timely paying for the subscribed shares;
- Not withdrawing capital contributed by common shares in any form, except in cases where the company or others shareholders redeem shares in accordance with the provisions of law;
- Complying with the company’s Charter and internal regulations;
- Abiding by resolutions of the General Meeting of Shareholders and the Board of Directors;
- Maintaining confidentiality of information provided;
- Fulfilling other obligations as prescribed by law and the company’s Charter.
III. Questions on shareholders holding preferred shares
1. Are shareholders holding preferred dividend shares entitled to dividends regardless of the company’s business performance?
Shareholders holding preferred dividend shares are entitled to fixed dividends irrespective of the company’s business results, pursuant to Clause 1, Article 117 of the Law on Enterprise 2020. Specifically, the law provides that preferred dividend shares carry dividends at a rate higher than or a stable rate compared to ordinary shares. Annual dividends comprise two parts: fixed dividends and bonus dividends. The fixed dividend is payable regardless of whether the company earns a profit or incurs a loss, and the specific rate as well as the method of calculating bonus dividends must be clearly stated in the share certificate of the preferred share.
Accordingly, holders of preferred dividend shares are entitled to receive a stable annual dividend, independent of the company’s financial performance at the time of distribution.
2. May shareholders holding preferred voting shares transfer such shares to others?
Shareholders holding preferred voting shares are allowed to transfer such shares to others, except in limited cases. Pursuant to Clause 3, Article 116 of the Law on Enterprise 2020, preferred voting shares may only be transferred:
- In accordance with a legally effective court judgment or decision; or
- By inheritance.
Thus, shareholders holding preferred voting shares are not permitted to transfer them to others, except in the two legally provided cases above.
3. Do shareholders holding redeemable preferred shares have voting rights?
Pursuant to Clause 3, Article 118 of the Law on Enterprise 2020, shareholders holding redeemable preferred shares have no voting rights, no right to attend general meetings, and no right to nominate members to the Board of Directors or Supervisory Board, except in special cases provided under Clause 5, Article 114 and Clause 6, Article 148 of the Law on Enterprise 2020.
4. Do shareholders holding preferred shares always have voting rights?
According to Articles 116, 117, and 118 of the Law on Enterprises 2020, only shareholders holding preferred voting shares are entitled to vote at general meetings, with a voting ratio higher than that of ordinary shares as stipulated in the company’s Charter. Conversely, shareholders holding preferred dividend shares and redeemable preferred shares have no voting rights, no right to attend general meetings, and no right to nominate members to the Board of Directors or Supervisory Board, except for certain statutory exceptions.
Accordingly, shareholders holding preferred shares do not have voting rights in all cases; voting rights depend specifically on the type of preferred share held.
5. Upon dissolution of the company, in what order and to what extent are shareholders holding preferred shares paid?
Pursuant to Clause 5, Article 208 of the Law on Enterprise 2020, upon dissolution, shareholders holding preferred shares are only entitled to payment after the company has fully settled its debts, in the following order of priority:
- Liabilities owed to employees (including salaries, severance allowances, social insurance, health insurance, unemployment insurance, etc.);
- Tax obligations;
- Other outstanding debts.
Only after all debts have been settled will the remaining assets be distributed to shareholders holding preferred shares, in accordance with the order of priority applicable to each class of preferred share.
Thus, shareholders holding preferred shares are entitled to a priority claim over the residual assets after the company has discharged all liabilities upon dissolution.
IV. Legal advisory services on shareholders holding preferred shares
The foregoing article prepared by NPLaw provides an overview of shareholders holding preferred shares. With a team of experienced lawyers and legal specialists, NPLaw is always ready to accompany, advise, and support clients on matters relating to preferred shareholders. For assistance with other legal matters, please contact NPLaw using the details below:
