After reading “What are Preferred Shares?”, read also “What are Common Shares?”
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Preferred shares are stocks that give the holder preference over the holder of common stocks.
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The most common forms of preferred shares may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends.
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No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares.
Preferred shares are stocks that give the holder preference over the holder of common stocks with respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
The law says:
Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends and in the distribution of corporate assets in case of liquidation, or such other preferences. (Section 6, Republic Act No. 11232 also known as the Revised Corporation Code of the Philippines)
The issuance of preferred shares is not without limitations. The limitations, as set forth in the RCCP include, that preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof and that such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission. (Section 6, RCCP)
Preferred shares take a multiplicity of forms. What are the forms of preferred shares? Jurisprudence says:
The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. (Republic Planters Bank vs. Hon. Agana, G.R. No. 51765, March 3, 1997)
Another form of preferred shares includes cumulative and non-cumulative preferred shares. (Aquino, Reviewer on Commercial Law, 2017 edition, p. 235) Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid. In light of the provision of the Code stating that all shares are equal in all respects unless otherwise stated in the Articles of Incorporation, a preferred share to be considered cumulative, the same must be provided for and specified in the certificate.
Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. This type may be divided into three groups:
- Discretionary dividend type – depends on the judgment or discretion of the board of directors. Unless there is grave abuse of discretion as to result in oppression, fraud or unfair discrimination, the dividend right of stockholders of a particular year cannot be made up in subsequent years;
- Mandatory if earned – impose a positive duty on directors to declare dividends every year when profits are earned. In effect, directors cannot withhold dividends if there are profits.
- Earned cumulative or dividend credit type – gives the holder the right to arrears in dividends if there were profits earned during the previous years. In effect, their right to receive dividends is merely postponed on a later date. The moment dividends are declared, back dividends earned in previous years but not declared as such must first be paid to this type of preferred shareholders before the common shareholders receive theirs.
What is the voting right of preferred shares? The law says:
No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code (Revised Corporation Code of the Philippines): Provided, That there shall be a class or series of shares with complete voting rights. (Section 6, RCCP)
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