In the context of an increasingly developed stock market, investors are not only interested in common shares but also in other types of shares, among which preferred shares are notable. In particular, dividend preferred shares are a relatively common form that offers distinct advantages to their holders. This article provides an in-depth legal analysis of such a type of share, based on the provisions explained by NPLaw, to offer a comprehensive overview of its characteristics, rights, and obligations.
I. Overview of dividend preferred shares
Dividend preferred shares are one of the share classes that receive higher returns compared to other types of shares in a joint-stock company, and they are often of interest to shareholders when contributing capital or distributing profits.
So, how does current enterprise law regulate such a type of share? Let’s explore with NPLaw through the details below.
II. Legal provisions on dividend preferred shares
1. Definition of dividend preferred shares
According to Clause 1, Article 117 of the Law on Enterprise 2020, a dividend preferred share is defined as a share that entitles its holder to receive a dividend higher than one of common shares or a stable annual dividend.
2. Conditions to become a dividend preferred shareholder
Under Clause 3, Article 114 of the Law on Enterprise 2020, the right to purchase dividend preferred shares is granted to individuals or entities as stipulated in the company’s Charter or as decided by the General Meeting of Shareholders.
3. Rights and obligations of dividend preferred shareholders
Pursuant to Clause 2, Article 117 of the Law on Enterprise 2020, a holder of dividend preferred shares has the following rights:
- To receive an annual preferred dividend;
- To receive the remaining assets of the company corresponding to their shareholding ratio after the company has settled all debts and redeemed redeemable preferred shares upon dissolution or bankruptcy;
- To enjoy other rights similar to those of common shareholders, except for the following:
- Holders of dividend preferred shares do not have the right to vote, attend or convene General Meetings of Shareholders, or nominate persons to the Board of Directors or the Supervisory Board, except where a resolution of the General Meeting of Shareholders alters their rights and obligations to their detriment. In such a case, the resolution shall only be passed if at least 75% of the dividend preferred shareholders of the same class present vote in favor, or if at least 75% of shareholders of such a class consent in writing.
As for obligations, the Law does not specify separate duties for dividend preferred shareholders. Instead, they are subject to the general obligations of all shareholders under Article 119 of the Law on Enterprises 2020, including:
- Paying in full and on time the subscribed shares;
- Complying with the company’s Charter and internal management regulations;
- Observing resolutions and decisions of the General Meeting of Shareholders and the Board of Directors;
- Keeping confidential all information provided by the company and using it only to exercise and protect their legitimate rights and interests;
- Other obligations as prescribed by law and the company’s Charter.
III. Questions about dividend preferred shares
1. Do dividend preferred shareholders receive dividends regardless of the company’s business results?
According to Clause 5, Article 4, and Point a, Clause 2, Article 117 of the Law on Enterprise 2020, dividends are the net profits distributed to each share in cash or other assets from the remaining profits of a joint-stock company after fulfilling all financial obligations.
Dividend preferred shareholders are entitled to dividends higher than those of common shareholders or at a stable annual rate. They may receive two types of dividends: fixed and bonus dividends. Fixed dividends are payable annually regardless of the company’s business results. Thus, even if the company incurs losses, holders of dividend preferred shares still receive their fixed dividends.
Therefore, holders of dividend preferred shares are entitled to dividends independent of business performance, but only for the fixed dividend portion.
2. How are dividends from dividend preferred shares distributed?
Under Clause 1, Article 117 of the Law on Enterprise 2020, dividends for preferred shares consist of fixed dividends and bonus dividends. The fixed dividend does not depend on the company’s business results. The specific fixed dividend rate and method for determining the bonus dividend must be stated in the dividend preferred share certificate.
3. Do dividend preferred shareholders have voting or meeting rights at the general meeting of shareholders?
According to Clause 3, Article 117 and Clause 6, Article 148 of the Law on Enterprise 2020, holders of dividend preferred shares do not have the right to vote or attend General Meetings of Shareholders, except when a resolution of the General Meeting adversely affects their rights or obligations. In such cases, the resolution shall only be adopted if at least 75% of the dividend preferred shareholders of the same class approve it, either in person or through written consent.
4. Do dividend preferred shareholders have any other rights besides receiving dividends?
Under Clause 2, Article 117 of the Law on Enterprise 2020, in addition to the right to receive preferred dividends, dividend preferred shareholders also have the right to:
- Receive the remaining assets of the company proportional to their shareholding upon dissolution or bankruptcy, after all debts have been settled;
- Enjoy the same rights as common shareholders, except for voting, attending General Meetings, and nominating members to the Board of Directors and Supervisory Board, unless the conditions for approval of changes affecting their rights are met as stated in above.
5. Is the company obliged to pay annual dividends on dividend preferred shares?
According to Clause 1, Article 135 of the Law on Enterprise 2020, dividends on preferred shares must be paid according to the conditions applicable to each type of preferred share. Clause 1, Article 117 of the same law stipulates that dividends on dividend preferred shares include fixed and bonus dividends, and the fixed dividend is not dependent on business performance. The specific rate and determination method must be stated in the preferred share certificate.
Accordingly, it can be understood that companies are legally obligated to pay annual fixed dividends to holders of dividend preferred shares.
IV. Legal consulting services on dividend preferred shares
The above information has been compiled by NPLaw to clarify legal issues concerning dividend preferred shares. Should readers have further questions or require additional assistance, please contact NPLaw for direct consultation and legal support.
