Legal Protection For Preferred Shareholders’ Rights

Preferred stock is a class of stock giving its holder a preferential claim to dividends and to corporate assets upon liquidation but that usually carries no voting rights. As an important investment and financing tools, preferred stock is preferred for its fixed revenue and low risk by a large number of investors, and greatly adopted by the issuers for causing no dilution of voting rights and bringing financing flexibility other than debts. It will be useful on widening the financing channels, enriching investment tools and promoting economic development. With the outstanding system value in the security market and the field of investment and financing, preferred stock is generally recognized and adopted for more than 100 years of history and has become a mature system in the western countries with developed market economy system.However, the preferred stock system has not been fully utilized for the reason that there is no clear and definite arrangement for preferred stock in the Company Law and Securities Law in China. The State Council and CSRC successively announced to launch a pilot project on preferred stock and issued the Guiding Opinions of the State Council on the Pilot Launch of Preference Shares and the Measures on the Administration of the Pilot Scheme of Preference Shares in the last two years, which gives the legal basis for the issuance and operation of the preferred stock. Although the path of legislation on preferred stock is just on the beginning, we have to notice that the difference of rights between the preferred stockholders and the common stockholders may lead to conflicts of interests between them. The preferred stockholders give up the voting rights for the steady revenue on dividends which means lack of control and management in the company. It sits on a fault line between corporate and contract law. The overlap makes it a complex problem when interests conflict between preferred and common stockholders occurred. This thesis mainly comprises four sections besides the introduction and the conclusion.Chapter I gives an overview of the preferred shareholder rights. It contains the definition and the characteristic of preferred stock, and thus leads to the various types of preferred stock and its nature and value. In the same time, this part describes the current basic legislation provisions and practice circumstances of preferred stock rights in China.Chapter II compares the preferred stock regulations among our country and the US cases law developments and briefly reviews the cases and the evolution of judgment rules in the United States and the treatment of preferred shareholders’ rights in horizontal conflict situations. In the mean time, it can be concluded that the balance of interests is the key problem that causes conflicts between the relevant parties. It provides explanation for shareholder conflicts by examining the reasons for issuing preferred stock, the methods that usually causes abuse of rights, and the various situations in which shareholder conflicts are most severe.Chapter III elaborates on and critiques the deficiency of the previously proposed solutions to the preferred shareholder in China by comparing and learning from the US treatments. Moreover, this part introduces the current shareholder protection system in China which is of utmost importance to the protection of preferred shareholders’ rights and find out the paradox and the absent of some legal rules.Chapter IV proposes alternative remedies to the shareholder conflict which includes putting forward the inclusion of broad fiduciary rights in preferred stock certificates, the imposition of good faith contract interpretation requirements on courts, or the creation of special committees to represent preferred shareholders during certain corporate transactions.