Overview of a Preference Shares Investment Agreement

What is a Preference Shares Investment Agreement?

A Preference Shares Investment Agreement is a contract for an investor to invest in a company and get preference shares in return. Please note: investment by preference shares is highly sophisticated. If you are not familiar with how preference shares work or how this investment agreement operates, you must seek legal advice.

What are the advantages of a Preference Shares Investment agreement?

Preference shares have a wide range of features as corporate indicate a set of features while issuing them. It is crucial that, at an early stage of the discussion, the parties have a good idea of the rights attached to (or any restrictions that apply to) the preference shares. Major rights that may be attached to preference shares include:

Allowance for preference shareholders: Preference shares have dividend provisions that are cumulative or non-cumulative. Most of them have cumulative, which means any dividend not paid by the company accumulates.

Preference shareholders have no right to vote: Preference shares do not normally confer voting rights in the annual general meeting of a company except in special circumstances.

Par Value: Most preference shares have a par value. When it does, the dividend rights and call price are usually stated in terms of the par value.

Callable Preference Shares: Normally, preference shares have no maturity date. But callable preference shares may be retired by the issuing company upon the payment of a definite price stated in the investment.

Preemptive right of preference shareholders: Common law statute gives shareholders, equity or preference, the right to subscribe to additional issues to maintain their proportional share of ownership.

Participating Preference Shares: Most of the preference shares are non-participating, meaning that the preference shareholders receive only his stated divided and no more.

Always bear in mind there is not a single set of rights or restrictions that is universal. Each provision is a matter of negotiation; therefore, it is important for you to understand the provisions and to negotiate them with the counterparty where appropriate.

What should be included in the preference share investment agreement?

These are the basic things that are included in a Preference Shares investment agreement.

  • Details of the subscription, including the amount of investment and percentage of shares to be issued;
  • Pre-money valuation and round size;
  • Cap table;
  • Rights and restrictions of the preference shares to be issued;
  • The expected timeframe for the execution of the definitive agreement and completion of the subscription;
  • Board composition after completion;
  • Generic conditions precedent;
  • Reserved matters and other provisions in shareholders’ agreement;
  • Confidentiality; and
  • Exclusivity (if applicable).

What are the differences between an Ordinary Share and a Preference Share?

An Ordinary Share gives shareholders the right to vote on important matters such as appointing directors and can participate in internal corporate governance through attending annual meetings and voting. Shareholders can receive dividends if the company has made profits and is also protected against the financial obligations of the company.

A Preference Share doesn’t give voting rights to its shareholders but they will be given preferred treatment over the ordinary shareholders and a fixed amount of dividend payment is paid to its shareholders. They also enjoy a priority right to be repaid if the company becomes insolvent or entering liquidation in the future.

Conclusion

Investors who want settled dividends for a constant period should consider preference shares investment agreement. If you’re looking to invest in such shares, make sure you’re familiar with the pros and cons related to them.

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