China Introduces Pilot Program for Preferred Shareholders

December 20, 2013 Posted by China Briefing Reading Time: 3 minutes

Dec. 20 – China’s State Council released the “Guiding Opinions on Launching the Pilot Program for Preferred Shares (Guofa [2013] No. 46, hereinafter referred to as ‘Announcement’)” on November 30, which puts forward provisions on the rights and obligations of preferred shareholders, the issuance and trading of preferred shares, and associated rules and policies. Detailed information can be found below.

Preferred Shares
Preferred shares refer to a type of share issued pursuant to the Company Law, whose holders will have priority over ordinary shareholders on the distribution of company’s profits and remaining assets, but limited rights to participate in the management and decision-making of the company.

However, during the pilot period, issuers may not issue preferred shares with different priorities in terms of the distribution of dividends and remaining assets, but may issue preferred shares with different rights in respect of other terms.

Priority in Profit Distribution
According to the Announcement, preferred shareholders shall enjoy priority over ordinary shareholders in the distribution of company profits according to the agreed par-value dividend rate. Companies shall not distribute profits to ordinary shareholders before paying the pre-agreed dividends to preferred shareholders in full.

Moreover, preferred shareholders also enjoy priority in the distribution of the remaining assets, and in conversion and redemption of preferred shares.

Eligible Issuers
Issuers making public offerings are limited to the listed companies prescribed by the China Securities Regulatory Commission, while issuers making private offerings are limited to listed companies (including overseas listed companies registered within the Mainland) and non-listed public companies.

Issuance Criteria
The preferred shares already issued by a company shall not exceed 50 percent of the total number of the company’s ordinary shares, and the capital raised from the preferred shares shall not exceed 50 percent of the company’s net assets prior to the issuance.

Restriction on Voting Rights
The Announcement has imposed some restrictions on the voting rights of the preferred shareholders, providing such shareholders shall not attend shareholders’ general meetings and their shares do not carry voting rights except for the following circumstances:

Where the company’s articles of association relating to preferred shares are to be amended;
Where company’s registered capital is to be reduced by 10 percent or more in one time or on a cumulative basis;
Where the company is about to undergo merger, division, or change of company form;
Where new preferred shares are to be issued; and
Other circumstances stipulated in the company’s articles of association.

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