On November 30, 2013 the State Council issued Guiding Opinions on Launching Pilot Program for Preferred Shares (the “Opinions”), which set forth 16 guidelines concerning the rights and obligations of preferred shareholders, the issuance and trading of preferred shares, and associated rules and policies.
Although there is not yet a definitive list of potential issuers of preferred shares, it is widely expected that commercial banks, insurance companies, and infrastructure companies may be the first to be selected to participate in the pilot program. The China Securities Regulatory Commission (“CSRC”) is preparing detailed rules to implement the Opinions.
- Preferred Shares
Preferred shares refer to a type of shares to be issued pursuant to the PRC Company Law, whose holders will have priority over common shareholders on the distribution of dividends and liquidation proceeds, but limited rights to participate in the management of the issuer. The Opinions provide additional guidelines regarding preferred shares’ privileges in respect of the distribution of dividends and liquidation proceeds, conversion and repurchase of preferred shares, voting rights, and how to treat preferred shares when determining whether a threshold of shareholding has been reached in certain situations.
- Eligible Issuers
Both listed companies (including overseas-listed companies registered in China) and non-listed public companies will be able to issue preferred shares under the pilot program. Private companies will not be eligible to participate.
- Series of Preferred Shares
During the pilot period, issuers may not issue preferred shares with different seniority in respect of the receipt of dividends and liquidation proceeds, but may issue preferred shares with different rights in respect of other terms.
- Size of Preferred Shares
The aggregate number of outstanding preferred shares may not exceed 50% of the total number of outstanding common shares of an issuer, and the capital raised through issuance of preferred shares may not exceed 50% of the net assets of the issuer immediately prior to such issuance.
Preferred shares can be used as consideration in a M&A transactions and restructuring deals. A tender offer for a listed company must be extended to all shareholders, including the holders of preferred shares, but different terms may be offered to the common shareholders and preferred shareholders.
- Market Access for Foreign Investment
When a mandatory maximum foreign investment percentage exists, the percentage shareholding of a foreign investor is computed by aggregating the number of both preferred shares and common shares held.
The launch of the pilot program is a positive step, providing both listed companies and non-listed public companies an additional avenue of financing, while diversifying investment channels for investors.