Why do companies issue preference shares?

Equity capital markets (ECM)

Some companies prefer to raise funds by issuing preference shares instead of issuing ordinary shares or getting loans for the following reasons:

1. Issuance of preference shares allows the companies to raise funds without affecting the voting powers of the existing ordinary shareholders.

Unlike ordinary shares, preference shares carry limited voting rights.

The definition of a “preference share” under the Companies Act 2016 (“𝐂𝐀 𝟐𝟎𝟏𝟔”) refer to a share which does not entitle the holder to voting rights. However, the FAQ issued by the Companies Commission of Malaysia clarifies that preference shareholders may have certain voting rights on matters relating to their respective class of shares provided that the rights are stated in the constitution of the companies.

The FAQ further states that the CA 2016 has generally retained the policy on the rights to vote for preference shareholders from the repealed Companies Act 1965, which are the right to vote:

(a) during the period when the preferential dividend or any part thereof remains in arrear and unpaid, such period starting from a date not more than 12 months, or such lesser period as the articles may provide, after the due date of the dividend;

(b) upon any resolution which varies the rights attached to preference shares; or

(c) upon any resolution for the winding up of the company.

These voting rights of preference shareholders are limited compared to the voting rights of ordinary shareholders on any resolution of the company.

2. The companies have more flexibility by raising funds through issuance of preference shares than issuance of debt securities or obtaining loans.

In respect of debt securities or loans, the companies would be in default if they cannot repay in accordance with the repayment schedule during financial difficulties.

On the other hand, the return for investment in preference shares is generally in the form of dividends, which preference shareholders have priority over ordinary shareholders. As companies are prohibited under the CA 2016 from paying dividend to shareholders if there is no sufficient profit for a particular financial year, this may provide some flexibility to the companies during financial difficulties.

3. Issuance of preference shares allow the companies to have lower debt-to-equity ratio compared to if they were to issue debt securities, which may be more appealing to future potential investors.

#malaysiancorporatelawyer
#equitycapitalmarkets

This post was first posted on Linkedin on 9 August 2021.

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