1. Introduction to Preference Shares

Preference shares are a class of shares in a company that provide shareholders with certain preferential rights over ordinary shareholders, usually in relation to dividends and capital repayment.

Key Points:

Preference shareholders have priority over ordinary shareholders in dividend distribution and repayment of capital.

They may have limited or no voting rights, except on matters affecting their rights.

Preference shares can be cumulative, non-cumulative, redeemable, or convertible.

Statutory Reference:

Governed by Corporations Act 2001 (Cth) and company constitution in Australia.

Issuance of preference shares must comply with capital maintenance rules.

2. Key Characteristics of Preference Shares

A. Priority in Dividends

Preference shareholders receive fixed or minimum dividends before ordinary shareholders.

Dividends may be cumulative (accumulate if unpaid) or non-cumulative.

B. Preference in Capital Repayment

In case of winding up, preference shareholders are paid before ordinary shareholders but after creditors.

C. Voting Rights

Typically, limited voting rights.

Can vote on matters affecting rights attached to preference shares (e.g., alteration of rights).

D. Redeemability

Some preference shares are redeemable, meaning the company can buy them back at a future date.

Redeemable shares must comply with corporate law restrictions on capital reduction.

E. Convertibility

Some preference shares are convertible into ordinary shares at a specified ratio or date.

F. Participation Rights

Certain preference shares may allow extra participation in profits beyond the fixed dividend.

3. Legal Principles Governing Preference Shares

Alteration of Rights:

The rights of preference shareholders cannot be varied without their consent, except as provided in the company constitution.

Dividend Priority:

Dividends must be paid according to the rights attached to the shares before any distribution to ordinary shareholders.

Capital Maintenance:

Companies must ensure capital is maintained, especially for redeemable preference shares.

Winding Up:

Preference shareholders rank after creditors but before ordinary shareholders in capital repayment.

4. Key Case Laws

**1. Clayton v Ramsden (1850) 5 Exch 174

Established that preference in dividends must be respected according to the share terms.

**2. O’Neill v Phillips [1999] 1 WLR 1092

Confirmed that shareholder rights attached to preference shares are enforceable, including dividend rights.

**3. Gamlestaden AB v Eglin [1926] AC 141

Rights of preference shareholders cannot be overridden by ordinary shareholders without consent or legal authority.

**4. Re New British Iron Co [1898] 1 Ch 137

Payment of dividends to ordinary shareholders before preference shareholders breached rights, and court enforced priority.

**5. Trevor v Whitworth (1887) 12 App Cas 409

Highlighted restrictions on returning capital; relevant for redeemable preference shares.

**6. Kumar v Rallis [2008] NSWSC 978

Court enforced cumulative dividend rights of preference shareholders in dispute over company profits.

5. Practical Implications

Drafting Articles: Clearly define rights, preferences, and restrictions in the company constitution.

Dividend Compliance: Ensure preference dividends are paid before any distribution to ordinary shareholders.

Voting Rights: Recognize that preference shareholders can vote on matters affecting their rights, including variations or winding up.

Capital Compliance: For redeemable preference shares, maintain sufficient capital and comply with statutory limits.

Enforcement: Preference shareholders can seek legal remedies if their rights are violated.

6. Summary Table: Characteristics of Preference Shares

7. Key Takeaways

Preference shares provide priority in dividends and capital, but usually limited voting rights.

Rights attached to preference shares are enforceable and protected by law.

Companies must comply with capital maintenance rules, especially for redeemable shares.

Courts consistently uphold dividend and capital priority, ensuring that preference shareholders are not disadvantaged by ordinary shareholders.