Preference Share Financial Priveleges

[rishi]

I'm at the final stages of the formation of a Thai co.ltd, where I hold 49% of the shares - all as preference shares - while my Thai wife holds the rest (except for 5 shares of 100 baht held by some of her family members) - all these are ordinary shares.

The preference shares - besides giving me voting rights 10:1 - give me a couple of financial priveleges. Since I'm not too familiar with legal/financial terms, misinterpretation of these priveleges isn't unlikely - so this is posted in the hope that some cleverer persons would kick in a few comments.

Here are the relevant paragraphs (quoted in full from the company's "Articles of Association"):

beginquote

The preferential rights of the preference shares are:

(1) having the right in dividend as fixes rate at 99.99% out of all amounts of the company's dividends declaration and the rights of first priority to receive such dividend and capital refundable;

and

(2) having the rights, in case of liquidation, of first priority to receive the accumulated dividend and capital refundable in full amounts of investment which the balance of which shall be refunded to the shareholders of ordinary shares.

endquote

My amateurish questions go like this:

A. Does (1) say that each year I can singlehandedly pocket 99.99% of the company's net profit (if that's what I wish)?

B. Does (2) say that, in case of liquidation, I can at best get only my invested capital back. If there is any money left it'll all go to the other shareholders - (inasmuch as I don't hold any ordinary shares)?

[Wekhin]

(1) You will get 99.99% of dividend, not profit. If the company makes 1 million baht of profit but pays only 100,000 baht dividend, you will get 99,990 baht (9.999% of profit).

(2) I think this one is ambiguous and can easily be interpreted like you mentioned.

How about this:

(2) having the rights, in case of liquidation, of first priority to receive 99.99% of the accumulated dividend and capital refundable which the balance of which shall be refunded to the shareholders of ordinary shares.

[GuestHouse]

Read this and smell the coffee

I put forward a question in response (link above) that bears a lot of consideration

Edited February 17, 2006 by GuestHouse

[Indo-Siam]

You need to look a lot closer. Unless things have changed, the way that the Thai Commercial Registration Department requires a preference share arrangement to be set up, it is the ORDINARY SHARES that have full voting rights, and the PREFERENCE SHARES that get a voting privilege of one vote per every 10 shares. So - the ordinary shares have voting control.

What the preference shares give is first priority on share-based financial distributions, in any situtation where a distribution is called for, but there are not enough assets to fully pay all shareholders equally.

This is the trade off - the shareholders that lose voting power gain preference in distributions.

As far as I know, there is no way the government will allow the same shareholders to have both voting preference, and distribution preference.

Steve

Indo-Siam

Edited February 18, 2006 by Indo-Siam

[BKK90210]

Below are some differences and their rights

Preference Shares

Preference shares offer their owners preferences over ordinary shareholders. There are two major differences between ordinary and preference shares:

•Preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not.

•Preference shareholders cannot normally vote at general meetings.

Note, that if by any chance a company cannot pay its preference share dividend then it cannot pay any ordinary share dividend since the preference shareholders have the right to receive their dividend before the ordinary shareholders under all circumstances - hence the term 'preference'.

Preference shares are usually cumulative and this means that if this year's dividend wasn't paid, then it will be carried forward to next year. So that if the £1,000 for 2004 was missed, then preference shareholders will receive £2,000 in 2005 (assuming the company is in a position to pay the dividend!).

If a preference share is a participating preference share then the owner of such a share has the right to participate in, or receive, additional dividends over and above the fixed percentage dividend discussed above. The additional dividend is usually paid in proportion to any ordinary dividend declared.

Finally, preference shares may be convertible. If the shares are convertible then the shareholders have the option at some stage of converting them into ordinary shares.

Ordinary Shares

Ordinary shares are also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.

Since the profits of companies can vary wildly from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial. Some businesses may choose to pay out a dividend even if it has had a difficult trading year and has made a loss! (How do you think this is possible and why might a business choose to do this?)

Ordinary shareholders can vote on all of the issues raised at a general meeting of the company including:

•Appointment of directors and auditors

•Whether to accept the dividend proposed

•Changes to the company's constitution (memorandum and articles of association)

[Carmine6]

I'm at the final stages of the formation of a Thai co.ltd, where I hold 49% of the shares - all as preference shares - while my Thai wife holds the rest (except for 5 shares of 100 baht held by some of her family members) - all these are ordinary shares.

The preference shares - besides giving me voting rights 10:1 - give me a couple of financial priveleges. Since I'm not too familiar with legal/financial terms, misinterpretation of these priveleges isn't unlikely - so this is posted in the hope that some cleverer persons would kick in a few comments.

Here are the relevant paragraphs (quoted in full from the company's "Articles of Association"):

beginquote

The preferential rights of the preference shares are:

(1) having the right in dividend as fixes rate at 99.99% out of all amounts of the company's dividends declaration and the rights of first priority to receive such dividend and capital refundable;

and

(2) having the rights, in case of liquidation, of first priority to receive the accumulated dividend and capital refundable in full amounts of investment which the balance of which shall be refunded to the shareholders of ordinary shares.

endquote

My amateurish questions go like this:

A. Does (1) say that each year I can singlehandedly pocket 99.99% of the company's net profit (if that's what I wish)?

B. Does (2) say that, in case of liquidation, I can at best get only my invested capital back. If there is any money left it'll all go to the other shareholders - (inasmuch as I don't hold any ordinary shares)?

I think Wekhin's interpretation of 2 is correct. If there are never any declared dividends, then the amount received is up to the full capital invested, and all profits go to the common shares. If there are declared dividends which haven't been paid, then you receive that amount in addition to the capital. If the amount upon liquidation is less than the original capital plus unpaid dividends, then nothing goes to the common shares.

Basically, do not liquidate the company without first declaring dividends of at least the excess over your capital contributed.

As for the legality of this arrangement, I have no clue. But the way it is written allows you to receive basically all the funds if dividends are declared correctly. If some of those things mentioned by others are true, then you're going to want some kind of dividend stated for the preference shares in advance whether or not it can be paid. Then whenever the company is liquidated, even if it's done suddenly, you'll be due a lot of unpaid dividends.

[BKK90210]

And don't forget the fine prints about the "Ordinary shareholders"

Ordinary shareholders can vote on all of the issues raised at a general meeting of the company including:

•Appointment of directors and auditors

•Whether to accept the dividend proposed

•Changes to the company's constitution (memorandum and articles of association)

This is said that the "ordinary shareholders"(his wife + 5 family members) can vote for to change the contents of the Articles of Associtation" any time! They're legally can do so.

What if later on they all got together and decided he shall not have that 99% div....what will happen to him then?...and Does he have the FULL VOTING RIGHTS by himself to liquidate the company?

Edited February 18, 2006 by BKK90210

[Carmine6]

You need to look a lot closer. Unless things have changed, the way that the Thai Commercial Registration Department requires a preference share arrangement to be set up, it is the ORDINARY SHARES that have full voting rights, and the PREFERENCE SHARES that get a voting privilege of one vote per every 10 shares. So - the ordinary shares have voting control.

What the preference shares give is first priority on share-based financial distributions, in any situtation where a distribution is called for, but there are not enough assets to fully pay all shareholders equally.

This is the trade off - the shareholders that lose voting power gain preference in distributions.

As far as I know, there is no way the government will allow the same shareholders to have both voting preference, and distribution preference.

Steve

Indo-Siam

Looks like for publicly traded companies preferred can have a max of the same voting rights. See below .pdf file page 3 which discusses paragraph 2 of section 102 of the Public Limited Company Act. PDF from BKK lawyers

There are some non-governmental websites that say you can give more voting rights to preference shares in Thailand when discussing land purchases. So perhaps this is possible for privately held companies.

Check the preference shares text

Another preference reference

But I finally found one that says this practice appears contrary to the Alien Business Law, but is widespread and you should get legal help.

See Joint Ventures

Sounds like it's not clearly prohibited and lawyers are interpreting it the way they want.

[rishi]

Thanks for the sharing guys - always good to get others input on eventual pitfalls.

It appears that my interpretation of OP's item (2), isn't far off - not much of a share for me of eventual remaining capital gains upon liquidation.

Nevertheless, it also appears that my lawyer has done an even better job, than I thought. The not so benefical item (2) appears to stem from a necessary trade off between control and distrubution of leftovers - as mentioned by Steve. But - as far as my understanding goes - provided I actually have the full control of company affairs, I also have the power to determine the leftovers if the company liquidates (assuming I'm in position to carry out my director duties).

As far as control goes, I'm sure I actually do have it. By now the company is officially registered, meaning that its Articles of Association have been officially approved - I presume? I'm the one and only director, and the articles clearly states:

"The voting right of ordinary shares shall be one share equal to one vote and the voting right of preference shares shall be one share equal to ten votes".

So - please correct me if I'm wrong - I believe, that unless the need for liquidation comes as a sudden strike from a blue sky (or I manage stupidly the year before) - there doesn't have to be more leftovers than I feel okay.

This all leads me to a possible answer to bkk90210's question:

... Some businesses may choose to pay out a dividend even if it has had a difficult trading year and has made a loss! (How do you think this is possible and why might a business choose to do this?) ...

A possible answer could be: A difficult trading year might lead to seriously considering liquidation. If the decission makers don't get much of a share after liquidation, they might want to sell out of assets and distribute gains as dividends and use whatever means they might have to "get rid" of capital gains, etc.

Well, I probably don't use the technical terms correctly, but I think its not too far from what Carmine6 writes in a different manner?

[Carmine6]

This all leads me to a possible answer to bkk90210's question:

... Some businesses may choose to pay out a dividend even if it has had a difficult trading year and has made a loss! (How do you think this is possible and why might a business choose to do this?) ...

A possible answer could be: A difficult trading year might lead to seriously considering liquidation. If the decission makers don't get much of a share after liquidation, they might want to sell out of assets and distribute gains as dividends and use whatever means they might have to "get rid" of capital gains, etc.

Well, I probably don't use the technical terms correctly, but I think its not too far from what Carmine6 writes in a different manner?

Yes, that's what I was saying. Have a lot of dividends declared so that whatever is left goes to you upon liquidation.

I didn't even notice that question in there. It's actually very common. Most companies don't pay out all their profits in dividends, especially early on. So even with a bad year, you may still pay the dividend since you've retained prior years' profits. The general tendency is to slowly increase the dividend even when the company is doing well so you can continue paying it even in bad years.

The way I interpret the text, I would declare dividends without paying them (if legal), which would leave a large accrued dividend should the company have to be liquidated quickly.

Not sure what kind of company we're talking about here, but you can also pay yourself a salary with appropriate legal authorization to work, and buy services and products from friends or family, or hire friends or family too.

[rishi]

•Preference shareholders cannot normally vote at general meetings.

According to its articles: in this particular company the preference shareholders voting rights apply to all shareholder meetings - including the generel ones - meaning that the combined (legal) powers of the ordinary shareholders aren't much of an issue.

The way I interpret the text, I would declare dividends without paying them (if legal), which would leave a large accrued dividend should the company have to be liquidated quickly.

Not sure what kind of company we're talking about here, but you can also pay yourself a salary with appropriate legal authorization to work, and buy services and products from friends or family, or hire friends or family too.

Thanks, for the hint. This thing with "declare dividends without paying them", sounds like something I better look into before this company starts to make too much money.

The kind of company we (or at least, I am) are talking about is at its offset, basically just a legal "shelter" to secure the legal basis for one foreigner to work and make money in Thailand. One of the first business undertakings of the new company, will be to buy that small-scale service business, my wife and I has been running for about 1/2 year by now (whereby a big part of the initial company capital, will be channeled back to the pocket it came from).

I'll be quite satisfied, even if the company - after having paid me and spouse a decent salary - never get around to dealing with capital gains. But better be prepared in case, we should strike it rich

[Wekhin]

There are some other points that you should consider.

1. Director(s) can have a resolution to pay dividend but the resolution must be approved in (general/extraordinary) shareholder meeting. Otherwise, it cannot be enforceable.

2. A company or director(s) only declares "to pay" dividend. When to pay is up to resolution of shareholder meeting.

3. A company can pay dividend only when it has no accumulated loss.

4. When paying dividend, a company must reserve profit amounted to 5% of dividend until it reaches 10% of registered capital. So, a company can only pay up to approximately 95.2% of capital gain.

5. A company might decide to dissolve for whatever reasons, even when it still makes profit. In this case, you will get 95.2% of capital gain from dividend payment plus your capital from preference shares. If your company has 2 million baht registered capital, 980,000 of capital and dividend go to you but 1.02 million and the reserve go to ordinary shareholders.

Edited February 18, 2006 by Wekhin

[Carmine6]

There are some other points that you should consider.

1. Director(s) can have a resolution to pay dividend but the resolution must be approved in (general/extraordinary) shareholder meeting. Otherwise, it cannot be enforceable.

2. A company or director(s) only declares "to pay" dividend. When to pay is up to resolution of shareholder meeting.

3. A company can pay dividend only when it has no accumulated loss.

4. When paying dividend, a company must reserve profit amounted to 5% of dividend until it reaches 10% of registered capital. So, a company can only pay up to approximately 95.2% of capital gain.

5. A company might decide to dissolve for whatever reasons, even when it still makes profit. In this case, you will get 95.2% of capital gain from dividend payment plus your capital from preference shares. If your company has 2 million baht registered capital, 980,000 of capital and dividend go to you but 1.02 million and the reserve go to ordinary shareholders.

Thanks for the details on the dividend mechanics in Thailand. Good clarification in 5 too. I completely forgot about the 51% in capital contributed by the common shareholders in my prior responses, which changes the scenarios a lot.