German company law knows numerous forms of shares. In addition to the classic ordinary share, the preference share is the most common. What are the advantages of a preferred share?
- The increased dividend payment for preference shares is offset by the lack of voting rights.
- The issue of preference shares increases equity without shifting majorities in voting rights.
- If the management board, supervisory board, general meeting and preference shareholders agree, preference shares can be converted into ordinary shares.
- In the case of voluntary conversion, the shareholders usually receive a conversion bonus.
The preferred share to distinguish it from the ordinary share
Once a year, shareholders receive an invitation to the general meeting of the respective stock corporation . This usually takes place in spring. Together with the invitation, you will also receive the agenda together with a power of attorney to exercise your voting rights. This power of attorney can be used if the shareholder does not attend the Annual General Meeting himself. However, voting rights can only be exercised by shareholders with ordinary shares.
Anyone who owns preference shares has no voting rights. In return, he benefits from a higher dividend . Ordinary shareholders are at a disadvantage in terms of dividend payment. Your entitlement to the distribution of profits does not apply until the preferential shareholders’ claims have been satisfied.
The dividend payment of the preference shares is capped, however, in order to enable ordinary shareholders to also pay dividends. The technical term for this is limited preference dividend.
Advantages of the preferred share from the company’s point of view
Preferred shares are often used in public companies that are predominantly family-owned. A stock corporation wants to carry out a capital increase. On the other hand, the management has no interest in changing the voting rights. In this case, preferred shares can be issued. With the promise of a higher profit sharing on the one hand, the management protects itself on the other hand against shifting interests among the shareholders.
Disadvantage of the preferred share from the point of view of the stock corporation
If the corporation’s profits are not as expected, the holders of preference shares must be served first. Ordinary shareholders may therefore go away empty-handed.
If the company’s profit in one year is so low that preference shares do not receive a dividend either, this entitlement can be postponed to the following years. This option does not apply to ordinary shares. This right to subsequent dividend payment is also known as the cumulative preferred dividend.
Conversion of preference shares into common shares
It is entirely permissible for preference shares to be converted into common shares. Two steps are necessary for this:
- The general meeting must approve the resolution of the board of directors and the supervisory board.
- In addition, the preference shareholders must also give their consent in accordance with Section 141, Paragraph 3 of the Stock Corporation Act.
The conversion itself can take place on a voluntary or involuntary basis. If the conversion into ordinary shares is voluntary, this step is usually rewarded. In addition to the ordinary shares, the preference shareholders also receive a conversion bonus.
A mandatory conversion is the less attractive option. The preferred shareholders do not receive any additional financial compensation.
When is a change possible?
Stock indices such as the Dax provide for a minimum market capitalization of the listed companies. If preference shares are only traded to a small extent, a conversion can lead to increased trading in common shares and facilitate access to an index.
A conversion is also possible if the stock corporation wishes to take the preferred shares off the market for lack of relevance.