Three differences between preferred and common shares. Conversion and redemption of preferred shares Conversion of preferred shares
Regulation of the Bank of Russia of August 11, 2014 N 428-P (as amended on December 18, 2018) "On the standards for the issue of securities, the procedure for state registration of an issue (additional issue) of emissive securities, state registration of reports on results ...
Chapter 50. Specifics of the placement of securities upon reorganization of legal entities
50.1. The decision on reorganization, as well as agreements on mergers and acquisitions, if these agreements provide for the consolidation and splitting of shares, may provide for a conversion ratio (distribution ratio) of shares, calculated taking into account the results of their consolidation and splitting, which at the time of their adoption (approval) are not yet implemented. Decisions to split and consolidate shares, as well as decisions to reorganize, can be taken simultaneously.
50.2. Shares on reorganization can only be converted into shares. In this case, ordinary shares can only be converted into ordinary shares, and preference shares - into ordinary or preferred shares.
Issuer's bonds and options can be converted into bonds and options of the issuer, respectively. In this case, one bond must be converted into one bond providing the same rights, and one issuer's option - into one issuer's option providing the same rights.
When converting into convertible bonds and options of the issuer, the number of shares into which they can be converted is determined in accordance with the share conversion ratio.
50.3. The placement of shares of a joint stock company, created as a result of reorganization, to shareholders - owners of shares of one category (type) of one joint stock company, reorganized in the form of a merger or acquisition, must be carried out on the same terms.
50.4. Securities of a legal entity created as a result of a merger, division, spin-off and transformation are considered to be placed in accordance with a decision on reorganization in the form of a merger, including a merger agreement, a decision on reorganization in the form of division, separation, transformation on the day of state registration of this legal entity. The securities of a legal entity to which the affiliation was made are considered to be placed in accordance with the decision on reorganization in the form of affiliation, including an affiliation agreement, on the day the entry is made in the unified state register of legal entities on the termination of the affiliated legal entity.
50.5. Shares of a joint-stock company being acquired or reorganized in the form of a merger, spin-off or division, the demand for redemption of which was submitted and which, in accordance with the Federal Law "On Joint Stock Companies", were redeemed, but were not sold before the date of entry into the unified state register of legal entities of an entry on termination activities of the acquired joint-stock company or before the date of state registration of a joint-stock company created as a result of a merger, spin-off or division, are not converted during reorganization and are not taken into account in the distribution of shares carried out during the spin-off.
50.6. Additional contributions and other payments for securities placed during the reorganization of a legal entity, as well as those related to such placement, are not allowed, except for the paid acquisition of shares during the transformation into a joint-stock company of employees (people's enterprise).
50.7. The reorganized legal entity is obliged to inform the registrar maintaining the register of the owners of securities of this legal entity on the fact of submission of documents for state registration of the legal entity created as a result of such reorganization (on the entry into the unified state register of legal entities of an entry on the termination of its activities), on the day submission of documents to the body that carries out state registration of legal entities.
The legal entity created as a result of the reorganization (the legal entity to which the affiliation was made) is obliged to inform the registrar maintaining the register of securities holders of the reorganized legal entity of the fact of its state registration (on making an entry on the termination of the activity of the reorganized legal entity) on the day the corresponding entry in the unified state register of legal entities.
50.8. Securities of legal entities reorganized by way of accession, merger, division, spin-off and transformation are redeemed upon conversion.
50.9. Placement during reorganization of shares, as a result of which the par value of preferred shares of a joint-stock company created as a result of the reorganization (a joint-stock company to which the affiliation was made) exceeds 25 percent of the size of its authorized capital, is prohibited.
50.10. Authorized capital a joint stock company created as a result of the reorganization may be more (less) the amount of the authorized capital of the joint stock companies participating in such a reorganization, as well as more (less) the authorized capital (share capital, mutual fund, authorized fund) of the legal entity transformed into it.
The amount of the authorized capital of joint-stock companies created as a result of the division may be more (less) than the authorized capital of the joint-stock company reorganized by such division.
50.11. The authorized capital of a joint-stock company, created as a result of the spin-off, is formed by reducing the charter capital and (or) at the expense of other own funds (including additional capital, retained earnings and others) of the joint-stock company from which the spin-off was made.
The authorized capital of joint stock companies created as a result of a merger or division is formed at the expense of the authorized capital and (or) at the expense of other own funds (including additional capital, retained earnings and other) of joint stock companies reorganized through such a merger or division.
The amount of the increase in the charter capital of the joint-stock company to which the merger was made is formed at the expense of the charter capital of the affiliated joint-stock company and (or) at the expense of other own funds (including at the expense of additional capital, retained earnings and others) of the joint-stock company to which the merger , and (or) an affiliated joint stock company.
The authorized capital of a joint-stock company created as a result of the transformation is formed at the expense of the authorized (joint-stock) capital (unit fund, authorized fund) and (or) at the expense of other own funds (including due to additional capital, retained earnings and others) of the legal entity reorganized by such a transformation.
50.12. Reorganization of a joint stock company in the form of a merger or acquisition with the participation of a legal entity of a different organizational legal form is allowed in the cases established by federal laws. Reorganization of a joint-stock company in the form of separation or division, during which a new legal entity of a different organizational legal form is formed, is allowed in cases established by federal laws.
A share is an equity security that secures the rights of its owner (shareholder) to receive part of the profit of a JSC in the form of dividends, to participate in the management of a JSC and to a part of the property remaining after its liquidation (Article 2 of the Federal Law of 22.04.1996 N 39-FZ " On the securities market ").
Distinguish between ordinary and preferred shares, distributed by open or closed subscription. The owners of the company's ordinary shares can participate in the general meeting of shareholders (hereinafter referred to as the General Meeting of Shareholders), have the right to vote on all issues of its competence and the right to receive dividends, and in the event of the liquidation of the JSC they have the right to receive part of the property (Article 31 of the Federal Law of December 26, 1995 year N 208-FZ). Each ordinary share gives its owner the same amount of rights and is not subject to conversion into preferred shares and other securities.
JSCs can issue preferred shares of several types, and the company's charter must determine the size of the dividend and (or) the cost paid upon liquidation of the company (liquidation value) on preferred shares of each type. The order of payment of dividends and the liquidation value of each type of preferred shares are determined.
Distinguish between cumulative and convertible shares. On preferred cumulative shares, the unpaid or incompletely paid dividend is accumulated and paid no later than the term determined by the charter of the JSC.
The charter of the company may provide for the conversion of preferred shares of a certain type into ordinary shares or preferred shares of other types at the request of shareholders - their owners, or the conversion of all shares of this type within the period specified by the charter of the company. Conversion of preferred shares into bonds and other securities, with the exception of shares, is not allowed. Conversion of preferred shares into ordinary shares and preferred shares of other types is allowed only if it is provided for by the charter of the company, as well as during the reorganization of the company.
Shareholders - holders of preference shares of a certain type, the amount of the dividend for which is determined in the company's charter, with the exception of shareholders - holders of preference cumulative shares, have the right to participate in the GMS with the right to vote on all issues of its competence, starting from the meeting following the annual GMS, to which, regardless of the reasons, no decision was made to pay dividends or a decision was made to pay incomplete dividends on preferred shares of this type. The right of shareholders - owners of preference shares of this type to participate in the GMS ceases from the moment of the first payment of dividends on the said shares in full.
Shareholders - holders of cumulative preference shares of a certain type have the right to participate in the GMS with the right to vote on all issues of its competence, starting from the meeting following the annual GMS, at which a decision was to be made on the payment of these shares in full amount of accumulated dividends, if no such decision was made, or a decision was made on incomplete payment of dividends. The right of shareholders - owners of cumulative preference shares of a certain type to participate in the GMS ceases from the moment of payment of all dividends accumulated on the said shares in full.
Often, organizations in the implementation of financial and economic activities invest free funds in securities (including shares) of other enterprises. This type of investment refers to financial investments (clause 3 of the Accounting Regulations "Accounting financial investments"PBU 19/02, approved by Order of the Ministry of Finance of the Russian Federation of December 10, 2003 N 126n).
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Convertible preference shares are preference shares that can be converted into ordinary shares at the discretion of the shareholder. This forces the shareholder to choose between making a profit through a liquidation advantage or through common stock.
Undoubtedly, if the value offered for the company exceeds the estimated total value of the enterprise at the time of investment, the shareholder will convert the preferred shares into ordinary shares to realize their share of the gain.
The table below shows the payouts for Max and Sam in case of different exit values \u200b\u200bif Max holds convertible preferred shares.
In theory, convertible preferred shares allow the entrepreneur to catch up with the investor in earnings after the investor's initial investment is paid. Compare the net payout schedule for convertible preferred shares with the previous schedule for net payout for mandatory redemption preferred shares (see table).
Net payout table
for a structure involving
convertible preferred shares.
If Max in our example had convertible preferred shares, the YippeeZang! buying the company would force him to decide whether to convert the shares. Recall that after the conversion, Max will own almost half of the company's shares.
If he were to convert preferred shares to common stock, he would receive 49.95% of the proceeds (about $ 1 million), as a result of which he would be at a loss. That is why he would not convert the stock, but instead return his original $ 1.5 million investment from the redemption of the non-convertible preferred stock, leaving Sam with the remaining $ 500,000.
On the other hand, if YippeeZang! decided to pay more than $ 3 million for Sam's company, Max would have an incentive to convert the shares into commons to get his 49.95% stake in any premium over the estimated $ 3 million that YippeeZang! would offer.
If, for example, YippeeZang! offered $ 4 million, Max would happily convert the stock and receive $ 2 million.
One of the results of the convertible preferred stock structure is that Max gets every dollar from the sale of the company until the company's price exceeds his $ 1.5 million advantage. After that, Max will have to decide whether to convert the shares or take advantage of his advantage. Until the price reaches $ 3 million, it will be more profitable for him to take advantage of the cost of $ 1.5 million.
Thus, Max's payout schedule has a "flat area" between the points corresponding to the sale of the company for $ 1.5 million and for $ 3 million. In this range, Max always receives $ 1.5 million and Sam receives the amount corresponding to the increase in the company's selling price.
It's catching up - when Sam catches up with Max, once Max gets all his money back. At the end of the catch-up phase, the gross (non-net) payouts that the two participants receive are approximately equal.
Why don't we see any of these types of preferred shares on young public companies? In short, because preferred share structures are somewhat complex, young public companies avoid them. stock markets companies are generally expected to have a simple capital structure, with only equity and debt.
Mature public companies, especially financial services companies, often have multiple layers of preferred shares in many forms.
Underwriters almost always insist that all preferred shares be converted at the time of the IPO.
To avoid a round of negotiations in which investors demand compensation for converting them into common shares, convertible preferred shares usually contain a mandatory conversion clause, which allows the company to force investors to convert within the guaranteed IPO of a certain (agreed) volume and price.
The minimum size required to launch such a conversion is usually significant enough to provide a liquid market, and the minimum price is usually 2-3 times the price at the time of investment - enough to warrant an investor's interest in the conversion.
Convertible Preferred Participating Shares
Convertible Preferred Participating Shares - these are convertible shares with the additional characteristic that in the event of the sale or liquidation of the company, the holder is entitled to receive the par value and their share in the share capital, as if the shares were converted; that is, it participates in the share capital even after the conversion.
Like the convertible preferred shares, these instruments have a forced conversion clause that is triggered on a public offering. The bottom line is that we have an instrument that behaves like mandatory buy-back preferred shares when the company is non-public and converts to common shares on a public offering, as shown in the table below.
Net payout table for structure
with the participation of convertible preferred shares
with the right to participate.
* Unlike a mandatory redemption preferred share structure, convertible participating preferred shares are converted to an ordinary share structure after the IPO.
Undoubtedly, the mandatory conversion clause is the main reason for using convertible participating preferred shares instead of a structure with mandatory buy-back preferred shares and cheap common shares.
Convertible Preferred Shares do not have the inconvenient characteristic of a mandatory payment to private investors at the time of a public offering. This is a trait that underwriters usually dislike, as it is easier to sell new public shares if all proceeds are used to develop the company's business rather than to pay existing shareholders.
Participation details: change of control structure
The key accompanying condition of the convertible preference shares with the right to participate stipulates when the condition of participation is in effect; Usually the condition says “ in case of sale or liquidation”, And it often defines a liquidation as any merger or transaction that constitutes a change in the structure of control.
As a result, a merger between two non-public companies may activate this clause if the privately held, continuing combined company issues new shares in exchange for the pre-merger preference shares of the acquired company.
Holders of convertible participating preference shares may then require the receipt of both new shares, equivalent at par to the old preferred shares, and participation in ordinary shares of the new company, equivalent to the converted shares for holders of ordinary shares.
This, in turn, can lead to the problem of valuation of the corresponding securities, since the condition for participation involves the receipt of shares, the valuation of which is equal to the par value of the preferred shares. Note that in such a transaction, liquidity as such is not generated ( funds do not change owners), since it is an exchange of private illiquid securities.
Certain preferred shares can be converted into ordinary shares of the issuer. This feature gives the holder the right to convert some of the preferred shares into a predetermined number of the issuer's ordinary shares. Convertible preference shares are preference shares with an embedded call option on ordinary shares. However, most issues of preferred shares are also revocable, and this effectively allows the issuer to force the holders of preferred shares to either convert their preferred shares into common shares or sell them in exchange for money.
To understand what happens to revocable preferred shares, we need to explain some terms. The first is the conversion value of preferred shares; it is equal to the number of ordinary shares into which one preferred share can be converted, multiplied by the present value of one ordinary share. Secondly, this
the actual revocation price equal to the nominal revocation price in effect at the time of the revocation plus any accrued dividends.
Obviously, the investor will be guided by considerations of his own benefit when deciding whether to convert or surrender shares. If the actual recall price is higher than the conversion value, the preferred shareholder will surrender the security in exchange for its redemption value. If the conversion value is higher than the actual call price, then the holder will convert his preferred shares to common shares. Companies usually revoke preferred shares when they are “in the money” (and thus the conversion cost exceeds the recall price). Thus, recalling a preferred share in a “in the money” situation is called a “need-to-be” recall.
As an example of revocable and convertible preferred stock, consider a preferred stock issued by Western Gas Resources with an annual cash dividend of $ 2.6250 per share, payout
which is produced quarterly. Example 12.7 shows the Bloomberg screen for this issue's preferred securities. Each of these preferred shares may be converted into 1.2579 ordinary shares at any time before December 31, 2049. The preferred shares were recalled at a price of $ 50.79. The parity price is the conversion value equal to market price common share ($ 30.61) multiplied by the number of common shares (1.2579) into which preferred shares can be converted. Accordingly, the premium is the ratio of the market value of the preferred shares to the conversion value, expressed as a percentage. Investors pay a premium when buying common stock by converting preferred stock because the conversion feature is an embedded call option on common stock convertible only when it is in the investor's best interest. The risk of impairment for the investor is limited by the direct value of the preferred shares (ie the value of the convertible preferred shares without a conversion option).
Special Properties Convertible Preferred Shares
In the mid-1990s. there has been a surge in innovation in the specialty convertible preferred stock sector. Next, we will look at their main types.
Preferred securities of trusts
Trust Company Preferred Securities (TOPrS) are also convertible preferred shares. They differ from the convertible shares described above in that, for tax purposes, dividends on them may be subject to tax deduction; at the same time, they have a fairly high rating from the outside rating agencies... The main issuer forms a business trust in Delaware for the issue of securities - the securities are guaranteed by the main issuer. In the case of TOPrS, there is no tax privilege in the form of exemption of 70% of dividend payments from income tax, and the issuer can postpone the payment of dividends for up to 20 quarters (5 years). However, if there is a deferral for the payment of dividends, the main issuer cannot pay dividends to holders of ordinary or preferred shares, therefore TOPrS dividends are accrued and accrued on a quarterly basis. TOPrS are usually revoked starting from three to five years from the date of issue and redeemable after 20-30 years. Due to the specifics of taxation and the possibility of deferred payment of dividends, TOPrS has a relatively higher dividend yield than other preferred shares.
Variety of abbreviations
There are many convertible preferred instruments that provide investors with higher dividend yields and opportunities to realize the upside potential of common stocks through conversion at
- 295 - registered shares. Salomon Smith Barney's Dividend Enhanced Convertible Stocks (DECS) and Merrill Lynch's Preferred Redeemable Increased Dividends Equity Securities (PRIDES) are two prime examples of such instruments. These convertible preferred securities offer high dividend yields, mandatory convertibles at maturity (usually three to four years), and conversion ratios to correct for declines in value as the prices of the respective common shares rise, thereby limiting their upside potential.
Another similar type of convertible preferred securities is Merrill Lynch's Preferred Equity Redemption Cumulative Stock (PERCS). PERCS also provide high dividend yields and require mandatory conversions at maturity, but limit the upside potential for the investor by adjusting the conversion rates at maturity so that investors receive common shares for a fixed dollar amount.
The issue of preferred shares can be used to redistribute corporate control.
The legislation does not require that the par value of preferred shares be equal to the par value of ordinary shares. Moreover, if preferred shares acquire the right to vote, then each such share gives its owner one vote, regardless of its par value. If preference shares have not been issued before, when they are issued, the existing shareholders - owners of ordinary shares do not have a priority right to acquire preference shares.
Thus, a shareholder or a group of shareholders owning 75% of the company's shares has the opportunity to make a decision at the general meeting of shareholders on the issue and placement by closed subscription of low-nominal preferred shares, the number of which will significantly exceed the number of previously issued ordinary shares. After the dividend has not been paid on these shares at least once, the owner of the preferred shares will become the owner of the full controlling stake at all subsequent general meetings of shareholders.
True, the implementation of such a scheme for the redistribution of corporate control requires accuracy.
First, the initiator needs to have a sufficiently large number of voting shares to obtain a qualified majority at the general meeting of shareholders, which is necessary to make a decision to increase the authorized capital.
Secondly, one should be extremely careful in determining the offering price of preferred shares. We remember that the placement price of additional shares must correspond to their market value. Today there is arbitrage practice when minority shareholders appeal such decisions. If a shareholder proves that the offering price of low-par preference shares does not correspond to their market value, then the court with a high degree of probability will recognize the issue as invalid. Thus, an unconditional recommendation when placing preferred shares in conditions where such a decision can be appealed is to set the offering price close to their real market value.
Thirdly, one should not forget about the approval of transactions for the placement of additional shares as interested-party transactions.
Art. 83 of the Law provides that, depending on its parameters, an interested party transaction may be approved either by the board of directors or by the general meeting of shareholders of the company. However, since clause 4 of this article provides that if the subject of a transaction or several interrelated transactions is property, the value of which, according to accounting (the offer price of the acquired property) is 2 percent or more book value assets of the company according to its accounting statements for the last reporting date, the decision can be made only by the general meeting by a majority of votes of all shareholders who are not interested in the transaction - owners of voting shares, the option with a decision by the board of directors of interest in in this case does not represent.
What should be taken into account when preparing the general meeting of shareholders, at which an interested-party transaction on the placement of preferred shares will be approved?
First of all, you need to remember that if shares are placed directly to any shareholder, or its affiliated
persons, this shareholder does not vote on this issue on the agenda of the meeting. Thus, the shares must be placed either by an independent (albeit formally) person, or the majority of other (disinterested) shareholders must agree to such an offering and vote for it.
The second important point when holding such a general meeting is that the decision must be made by a majority vote of all shareholders not interested in the transaction. At the same time, in this case, the legislator requires that the majority be taken into account from all disinterested shareholders, and not from disinterested shareholders who took part in the general meeting.
Practice shows that in "old" joint-stock companies that emerged during the period of mass privatization, this condition is often very difficult to ensure. Indeed, the main block of shares is usually concentrated among the majority shareholders, and if they are interested parties in the placement of preferred shares, only minority shareholders will vote. However, many of them died, and none inherited their shares; have moved without notifying the registrar and are not receiving notice of the meeting. Finally, they just never go to meetings. If there are more than half of such shareholders, it will be impossible to make a decision to approve the related-party transaction. The only way out, which the author sees in this case, is to take measures in advance to ensure that the transaction on the placement of preferred shares does not fall under the definition of an interested-party transaction given in the law.
Here's another way to change the "balance of power".
The current legislation provides for the possibility of consolidating the company's shares. That is, two or more placed shares of the company may be, in accordance with the provisions of Art. 74 of the Law, converted into one newly placed share. Such a decision will be taken by a simple majority of votes of shareholders - owners of ordinary shares and may apply only to these ordinary shares.
Thus, the total number of outstanding ordinary shares can be reduced by any whole number of times. The number of preferred shares will remain unchanged.
Consequently, the number of votes of shareholders - owners of ordinary shares will be reduced, but no preferred ones. The situation will not change even if, as a result of the conversion, a number of shareholders acquire fractional shares. Item 3, Art. 25 of the Law stipulates that a fractional share grants to the shareholder - its owner the rights provided by the share of the corresponding category (type), in the amount corresponding to the part of the whole share that it constitutes. Consequently, even a share split into several parts will give only one vote in total. Thus, the goal of gaining more complete control over society will be achieved.
Let's consider another situation. A shareholder (group of shareholders) interested, for example, in the placement of the company's shares by private subscription or in making certain amendments to the charter, does not have the initially qualified majority of votes to make such a decision. However, he (his allies in this matter) has at his disposal preferred shares, the size of the dividend for which is determined in the charter of the company, in an amount, in total with ordinary shares, which allows this to be done.
If the number of votes belonging to such a shareholder turns out to be more than 50 percent of the total number of votes of shareholders who took part in the general meeting of shareholders (given the extremely low activity of shareholders, this figure may not be too large), such a shareholder has the opportunity to block the adoption of a decision by the general meeting of shareholders on the payment of dividends on preferred shares. And preferred shares at the next meeting will become voting shares.
Third situation. The company that has issued both ordinary and preferred shares is going to make a decision that does not meet the interests of minority shareholders. If the dividend on preferred shares was paid earlier, then such shares do not vote in the meeting. But Article 43 of the Federal Law "On Joint Stock Companies" contains a list of situations when the general meeting of shareholders is not entitled to make a decision on the payment of dividends on preferred shares. For example, if the society meets the signs of insolvency (bankruptcy).
If a shareholder identifies such a situation, he will be able to judicially recognize the decision of the general meeting of shareholders on the payment of dividends as invalid (regardless of whether the dividends have already been paid physically), thereby drastically changing the balance of power at the upcoming general meeting.
Let us draw the reader's attention to some of the subtleties of the established arbitration practice.
There have been cases when the annual general meeting in the joint-stock company was not held or was disrupted. Accordingly, at such a meeting, no decisions were made on the payment of dividends on preferred shares. Will preferred shares become voting?
A number of lawyers consider it possible in this situation to consider the preferred shares of the company as voting shares. However, the court practice takes a different path, indicating that, within the meaning of the provisions of the Law, the owners of preferred shares receive the right to vote if the annual meeting has taken place, but the issue of paying dividends on preferred shares was not resolved or a decision was made to refuse to pay dividends. Failure to make a decision on the payment of dividends in connection with the failure to hold a meeting or a decision on non-payment of dividends at an illegal meeting does not grant the holders of preferred shares the right to vote.
There is also a judicial practice based on a literal reading of the provisions of paragraph 5 of Art. 31 of the Law. According to it, the voting right for preferred shares arises precisely in connection with the decision on non-payment or incomplete payment of dividends. If the decision to pay dividends is made, but dividends have not been paid, the right to vote does not arise.
Perhaps the common thing for all the scenarios discussed above is that when they are implemented, the majority shareholder (or a group of shareholders) uses their dominant position in the company to create a situation that actually infringes upon the rights of minority shareholders. Today, all described actions are absolutely legal. However, in recent years, the Federal Service for Financial Markets, the Ministry economic development bills were drafted on numerous occasions to close the possibility of using the dominant position of majority shareholders. So, in various documents it was proposed to establish that the par value of the company's preferred shares cannot be lower than the par value of ordinary shares, or to establish that when placing preferred shares of any type, shareholders - owners of ordinary shares have the right to preferentially purchase them in an amount proportional to the number of shares they have ordinary shares.
Thus, there is a possibility that in the near future most of the opportunities discussed above for using preferred shares to obtain or strengthen corporate control in JSCs will become illegitimate.
Preferred shares as an instrument of income payment
Let us dwell on the opportunities offered by preferred shares to a majority shareholder in making a profit.
The payment of income through dividends (we will make a reservation that further we are talking about residents of the Russian Federation) is beneficial to individuals in any case, since it is subject to 9% tax, which is significantly more profitable than paying other types of income. It is also convenient for making a profit legal entities... In this case, when calculating income tax, its rate will be 0%, provided that on the day of the decision on the payment of dividends, the organization receiving the dividend for at least 365 calendar days continuously owns at least 50 percent contribution (shares) in the authorized (pooled) capital (fund) of the organization paying dividends or in depositary receipts giving the right to receive dividends, in an amount corresponding to at least 50 percent of the total amount of dividends paid by the organization.
As shown above, the majority shareholder - the owner of more than 75% of the voting shares of the company has the opportunity to become the sole owner of preferred shares and in accordance with the provisions of Art. 43 of the Law to actually withdraw any share of the company's net profit in the form of dividends on them.
An essential point in the receipt of income on preferred shares, the size of the dividend for which (the procedure for determining it) is determined by the charter of the company, is the fact that the declared (paid dividends) should not exceed this amount fixed in the charter of the company. Otherwise, there is a high probability that the decision on the payment of dividends on preferred shares will be appealed by the shareholders who voted against it in court. Of course, this circumstance is important only if the company has other shareholders who are not part of the group interested in the payment of such dividends.
Returning to the above, I would like to note one more opportunity due to the relatively low level of taxation of dividend income for individuals. The placement of preferred shares to key employees of the JSC will actually allow them to pay part of their remuneration in the form of dividends. However, if we consider both full chains of taxation (for payment under an employment contract and for payment in the form of dividends), from the receipt of the revenue by the company to the payment money directly to an individual, it becomes clear that the question of the profitability of such a solution is not entirely simple.
The author does not consider it possible, in the format of this article, to dwell in detail on all the financial aspects of such a payment, however, in his opinion, the costs of society in any of the ways considered will, in general, be comparable. And of course, one must remember that dividends can be paid only if there is net profit in society.
In addition, it makes sense to compare the benefits of paying remuneration through an employment contract or dividends when it comes to the employees of the company who have an employment relationship with it. But in the course of the activity of the JSC, situations often arise when interaction with certain individuals is extremely important and beneficial. At the same time, the possibility of concluding an employment contract with them is excluded or significantly hampered. In this case, the placement of preferred shares to such persons, allowing them to receive the necessary income, may be the best solution.
For quite a long time, the main problems hindering the spread of this practice were the impossibility of stopping payments on shares upon completion of cooperation and the fear of unfavorable voting by their owners in cases stipulated by law. They tried to solve them in various ways. For example, it was often used to obtain "reverse" transfer orders in advance. However, this path cannot be considered legal.
There were attempts to conclude repo agreements providing for the right to repurchase preferred shares after a certain period. But even this option, from the point of view of the author, is unacceptable, since according to the provisions of paragraph 13 of Art. 51.3 of the Federal Law "On Joint Stock Companies" if the list of persons entitled to receive dividends from the issuer transferred under the first part of the repo agreement is determined in the period after the fulfillment of obligations to transfer securities under the first part of the repo agreement and before the fulfillment of obligations to transfer securities under the second part of the repo agreement, the recipient of the dividend will be the one who was the shareholder at the date of drawing up such a list.
The existing judicial practice allows us to say that it is possible to prevent the voting of the owners of preferred shares even if they do not pay dividends. For this, it is enough not to determine the size of the dividend on them. However, in many cases, such securities will not suit their prospective purchasers.
As of today, the author knows only one option, which makes it possible with a high degree of probability to ensure the desired regime of ownership of preferred shares and the termination of such ownership. Its implementation is due to the provisions of Art. 32.1 of the Law on Joint Stock Companies, dedicated to the shareholder agreement.
The shareholder agreement may provide for the obligation of its parties to vote in a certain way at the general meeting of shareholders, agree on the voting option with other shareholders, acquire or dispose of shares at a predetermined price and (or) upon the occurrence of certain circumstances, refrain from alienating shares until certain circumstances occur, and also carry out other actions in a coordinated manner related to the management of the company, its activities, reorganization and liquidation of the company.
Thus, it is possible to conclude a shareholder agreement, according to which the acquirer (owner) of preferred shares will not only be obliged to vote at the general meeting of shareholders in accordance with the instructions of the owners of ordinary shares, but will also have to sell them under certain conditions at a certain price.
Unfortunately, this method is also flawed. The problem is that the legislative possibility of concluding shareholder agreements has appeared quite recently. In this regard, there is practically no judicial practice on the issue of limiting the rights (or imposing additional obligations) on the owners of preferred shares, and, therefore, it is impossible to predict possible nuances of law enforcement when the courts consider future claims based on the provisions of shareholder agreements.
We will be especially careful if preferred shares are issued by an open joint stock company
Shareholders of an open joint-stock company should additionally take into account that if, as a result of the described actions, the number of voting shares controlled by them together with their affiliates exceeds one of the thresholds of 30, 50, 75%, they will be subject to Ch. XI.1 of the Law, according to which they will have to carry out complex and expensive procedures related to the direction and implementation of the so-called "mandatory offer" to other shareholders of the company. Until such a proposal is sent, a shareholder may vote only with the number of shares not exceeding the first of the thresholds crossed during such an acquisition. Due to the limited scope of this article, the author does not consider it possible to dwell in more detail on the implementation of these procedures, however, he considers it necessary to note two circumstances.
Firstly, the current practice interprets giving preferred shares the status of voting as an option to acquire established by law package of shares. That is, if earlier a shareholder, owning 25% of ordinary and 20% of preferred shares, did not have the obligation to send to the company a mandatory offer to redeem all remaining shares, then as soon as the preferred shares belonging to him become voting, he will have this obligation. This situation extends even to cases where the acquirer himself did not vote for the decision, by virtue of which the preferred shares became voting, or even voted against such a decision. P. 8 Art. 84.2 of the Law contains a list of cases of acquisition of shares in which the requirements of Ch. XI.1 do not apply. Our case is not included in this list.
Secondly, these procedures can bring very interesting results in the future. So, if, as a result of the implementation of the mandatory offer procedures, a shareholder (alone or jointly with affiliated persons) becomes the owner of more than 95% of the voting shares of the OJSC, and at least 10% of this amount will be acquired by him during these procedures, the shareholder has the right at his request to buy back shares from other shareholders, which will provide him with full control over the company.
The stated in this article does not, of course, exhaust all the possibilities and all the problems associated with the use of preferred shares in corporate governance procedures. However, the author hopes that the presented material will allow readers to more fully use their potential and avoid the most obvious mistakes.
See, for example, Resolution of the Federal Arbitration Court of the North Caucasus District dated January 28, 2005 No. F08-6439 / 04; Resolution of the Federal Arbitration Court of the East Siberian District of 12.12.2006 No. A19-11170 / 06-53-F02-6682 / 06-C2.
Part two Of the Tax Code Russian Federation dated 05.08.2000, No. 117-FZ, art. 224, p. 4.
Resolution of the Federal Arbitration Court of the North-West District of July 21, 2008 No. A56-19949 / 2006.
See, for example, Resolution of the Federal Arbitration Court of the East Siberian District of 12.12.2006, No. A1911170 / 06-53-F02-6682 / 06-C2; Resolution of the Federal Arbitration Court of the North Caucasian District of January 28, 2005 No. F08-6439 / 04.
Federal Law dated 03.06.2009 No. 115-FZ "On Amendments to the Federal Law" On Joint Stock Companies "and Article 30 Federal law "On the Securities Market" (entered into force on June 9, 2009).
