HOW TO BUY DIVIDEND PREFERRED SHARES WHILE REMAINING VOTING PREFERRED RIGHTS?

Question: I was offered shares by a joint stock company. The director of the company said that, if I invest in that company, I will receive a fixed dividend every year and at simultaneously have priority in voting at the Company’s meetings. Are the promises of that company lawful and what should I do to protect my rights and interests?

Answer:

Thank you for your inquiry. For this question, we would like to advise as follows:

According to the 2020 Enterprise Law, a joint stock company is entitled to issue common and preferred shares. Among the types of preferred shares, there are dividend preferred shares and voting preferred shares. As you mentioned, we understand that the company is offering you the opportunity to enjoy not only a fixed dividend amount regardless of the business results of the company (dividend preferred shares), but voting preferred rights at meetings (voting preferred shares).

However, under current legal provisions, there is no way to enjoy both rights as aforementioned. Specifically, owners of common shares will not be entitled to preferred rights, and owners of preferred shares will only be entitled to one preferred right. For example, voting preferred shares shall not give rise to dividend preferred rights (instead, the shareholder in this case shall enjoy dividend based on the business result of the company) and in contrast, dividend preferred shareholders are not allowed to vote at the meetings of the General Meeting of Shareholders as well as to appoint/elect as a member of the Board of Directors and the Inspection Committee of the company. Therefore, the offer of the company is illegal.

Even in the case where the company wants to issue 2 types of shares to you at the same time, we would like to affirm that this is not feasible. Under Article 116.1 of the Law on Enterprises, only organizations authorized by the Government and founding shareholders are entitled to hold voting preferred shares. Therefore, the company will not be able to issue more voting preferred shares to you. The shareholders owning voting preferred shares themselves are also “not allowed to transfer such shares to other people, except in the case of transfer according to an effective court judgment or decision or inheritance” (Article 116.3 of the Law on Enterprises). Therefore, we affirm that, in this case, the plan to additionally issue or transfer voting preferred shares of the company to you is not possible.

However, if you still want to invest in the company, there are adequate grounds for you to meet both requirements: dividend preference and voting preferred right. Accordingly, in order to protect your interests, you should consider the following solutions:

1. Buy a large number of dividend preferred shares to ensure the right to receive a fixed annual dividend;
2. Buy a minimum number of ordinary shares sufficient to attend and vote at the General Meeting of Shareholders;
3. Specifically clarify in the share purchase agreement the obligations of the company, the management agency (the Board of Directors) of the company on works related to the issuance of shares and protection of shareholders’ interests.
4. Entering into contracts with major common shareholders (in which, the ownership rate could dominate the decisions of the General Meeting of Shareholders and/or the Board of Directors) of the company to bind shareholders on voting on matters under the General Meeting of Shareholders and/or the Board of Directors’ authority.

Since this is a rather complicated transaction and the accompanying documents need to be structured very rigorously, you should seek for opinions of experienced lawyers to ensure your rights when purchasing shares and participate in the management and administration of the company issuing shares.

The above is the consulting contents of ATA Legal Services. If you have any inquiries, please contact us by phone number, email or directly at the our office.