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Preference Shares for Singapore Company
Preference shares, commonly known as preferred stock, are shares of a company’s stock with dividends that will be paid out to shareholders before the issuance of common stock dividends. Most preference shares come with a fixed dividend, while common stocks usually do not have that fixed dividends. In the event of bankruptcy, preferred stock shareholders are entitled to be paid from company assets first.
What are shares?
Many businesses are incorporated as companies limited by shares- that means that each and every owner (or investor) possesses a certain portion or percentage of the company expressed as a number of shares. The company’s owners of a company and the company itself are separate legal persons. Therefore, any potential losses to the owners are limited to the value of their shares.
One of the versatile features of preference shares is that the terms are a matter of commercial agreement (subject to certain restrictions imposed by the Companies Act (“CA”)). Preference shares, as the name implies, are commonly confers priority of dividend payment over ordinary shares. As such, a preference share could get a higher dividend per share and/or a right to receive a dividend but preference shareholders often forego their voting rights.
Dividends are the distribution of a portion of a company’s earnings that will be paid to shareholders. Decided by board members, the dividends can be issued as cash payments, as shares of stock, or other property at the discretion of the management unless some sort of guaranteed minimum had been specified when the shares were first issued.
In the case that the company becomes insolvent, preference shares may confer upon preference shareholders a share of the company’s net assets in priority to ordinary shareholders.
According to the Company Act, a shareholder has the voting right on major matters, such as the issue of alterations to the constitution and shares. That said, shareholders usually do not possess the right to participate in the everyday management matters of the company, unless reserved matters are stipulated in the constitution requiring shareholder approval (e.g. incurring a debt in excess of S$100,000). However, whether a preference share carries the voting rights depends on the terms of the preference shares. It is possible to issue non-voting preference shares, or increased voting rights in respect of certain matters (e.g. appointment of directors).
Special types of preference shares
Preference share comes in a wide variety of forms. Among many others, redeemable and convertible, are the two special types of preference shares.
- Redeemable preference shares – preference shares with a “buy back” option – the company may buy back the preference shares from the holder at a fixed price (either at the option of the holder or of the company).
- Convertible preference shares – shareholders could exchange the preference shares for another instrument in the capital of the company, such as ordinary shares. The company would fix the rate of exchange at the time of the issuance.
According to the Securities and Futures Act (“SFA”), the “offers of securities” that includes ordinary shares and preference shares must be accompanied by a prospectus – the comprehensive document commonly issued to investors in initial public offerings. Issuers of preference shares usually depend on the private placement exemption under the SFA to avoid the prospectus requirement. A series of conditions need to be fulfilled for this exemption, and the “offer of securities” is the most important and must be made to no more than 50 persons within any period of 12 months.
How do I issue preference shares?
Singapore companies are allowed to create share types that offer different privileges and rights to shareholders. A company can issue new shares at any time with shareholder’s approval to an ordinary resolution. Please note that it is mandatory to file the return of allotment with the Accounting and Corporate Regulatory Authority (ACRA) through BizFile within 14 days of issuing the shares. The return of allotment must include the following information:
- The number of the shares in the allotment
- The amount (if any) paid or deemed to be paid on the allotment of each share
- The amount (if any) unpaid on each share
- The class of shares issued (if applicable)
- The full name, identification, nationality, and address (for shareholders who are individuals)
- The corporation name or UEN, and address (for shareholders that are corporations)
- The number and class of shares held by each of its members
According to the Section 75 of the Company Act, preference shares may only be allotted where the constitution of the company spells the rights of the preference shareholder ‘with respect to repayment of capital, participation in surplus assets and profits, cumulative or non-cumulative dividends, voting and priority of payment of capital and dividend in relation to other shares or other classes of preference shares.’ The process for amending a company’s constitution is specified in the Company Act and the constitution of the company.
How do I convert or redeem preference shares?
According to the terms set by the company at the time of subscription, convertible or redeemable preference shares can be issued with some restrictions apply to redemption. Redeemable preference shares only meant those fully paid-up shares (when there are profits available for such redemption and it is subject to statutory exceptions). In the time of redemption, a prescribed notice of redemption must be lodged with ACRA.
If you encounter any issues in preference shares, be it the issuance of shares or the procedures, please do not be hesitate to contact us!