What are preference shares?

Is your company seeking to raise funds? Are you considering the issuing of preference shares?

What exactly is a preference share?

A preference share is one of the many types of shares that a company may offer to investors. Their main characteristic is that they provide preferential treatment with respect to insolvency. They are considered a type of hybrid security and may be classified as both debt and equity depending upon the preference structure.

Preference shares can be listed on the Australian Stock Exchange for public companies or unlisted for private companies.

Do I have preference over other shareholders?

The term preference indicates that the shares rank before ordinary shares in the event of liquidation. This means that if a company becomes unable to pay its debts you will have a prior claim on the company’s assets over other shareholders, but nonetheless you will still be behind creditors in priority.

Preference shares pay regular dividends based upon the profit of the company. As a preference shareholder you also rank ahead of ordinary shareholders in relation to the distribution of these dividends.

Can preference shares be converted?

Most preference shares are convertible and can be or will be converted into ordinary shares at a certain point in the future. The number of ordinary shares you will receive on conversion will depend on the conversion mechanism that was specified in the prospectus when the shares were issued. You will usually receive the fixed dollar value of preference shares in ordinary shares at their present market value. Therefore the higher the market value of ordinary shares at the time of conversion the fewer shares you will receive.

If you wish to sell your preference shares before conversion, you can do so on the Australian Stock Exchange if listed, or in line with a company’s by-laws or articles of association if unlisted.

What do I need to consider when purchasing a preference share?

When purchasing a preference share, there are a number of things to consider.

Make sure you check the dividend rate including whether it is fixed or is floating. You should also determine whether the dividend is franked. This means that that the taxation of the dividend has been partially paid by the company issuing the dividend, to avoid double taxation of the share.

You should also review how and when the preference share will convert into ordinary shares.

Conclusion

Are you or your company purchasing or issuing shares? The process of raising funds is one of the most regulated fields of Australian law. Call LegalVision so we can run you through everything today!