Cerize Roets — Head of Legal Services, Kilgetty Statutory Services
Predominately in the market place, a preference share is issued as a way for businesses to raise money without diluting existing shareholder value and to provide a profit sharing arrangement to a specific shareholder. In most cases, this is achieved by the issuing of a preference share that is separate to the existing ordinary shares in issue.
What are preference shares?
A preference share is a share which entitles the holder thereof to a fixed dividend and whose payment takes priority over that of an ordinary share dividend. This can offer investors an exclusive return on their investments. This type of share is usually used to structure specific profit sharing arrangements in a company.
What does this mean?
In the event of a Board of Directors declaring a dividend, the preference shareholder will be entitled to receive their dividends prior to any other dividends being paid out to an ordinary shareholder. This implies that preference shareholders receive preferential dividends that are based on the profits of the company.
A preference shareholder is also entitled to additional preferential treatment in the event of a liquidation which can afford them first-claim rights on the company’s assets or proceeds of sale. This can serve as a protection mechanism for investors.
Other types of preference shares
Different types of preference shares may be issued for specific purposes—these are:
Redeemable Preference Share
A redeemable preference share is a share that holds the same rights as a preference share, except for the fact that it has an agreed date within which it must be redeemed (i.e. repurchased by the company at an agreed price).
This type of share is usually used to structure the repayment of a loan or share capital provided by an investor during a specific period.
Cumulative Redeemable Preference Share
A cumulative redeemable preference share has the same rights as a redeemable preference share except for the fact that it includes a provision that stipulates that if any dividends have been omitted in the past, then these must be paid to the holders of cumulative redeemable preference shares prior to the payment of any dividends to ordinary shareholders at the redemption date.
This type of share is usually used to structure the repayment of loans or share capital provided by an investor during a specific period whilst ensuring that the holder of such shares has comfort in redeeming the necessary amounts in the event of the non-declaration of preference dividends in prior periods.
When considering the benefits of preference shares, investors may consider preference shares as an investment alternative to ordinary shares.
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