A Research On The Development Of Preferred Shares Mechanism In China

Despite of its wide use in international investment and financing, the preferred shares mechanism lacks legal basis in China, a country with sole shareholding structure. Besides, the mechanism could not be utilized in practice due to China's rigid approval system for company establishment. With the growth of economy, it is necessary for China to develop the preferred shares mechanism. On one hand, preferred shares, as a kind of mezzanine securities between equity and debt, can provide more flexibility for corporate financing. On the other hand, based on the jurisprudence of exchanging the inferiority in rights of public welfare (e.g., voting rights) for the superiority in rights of self-benefit (e.g., dividend distribution, surplus assets distribution), the preferred shares can endow better protection to the rights of minority shareholders.With respect to the preferred shares legislation, the statutory legislative style of French law better matches China's legal environment, as China is a statutory law country with its company laws primarily composed of mandatory rules. Meanwhile, China's legislation should absorb the freedom spirit as represented by the enabling legislative style of US preferred shares rules.One of the major issues faced with the preferred shares mechanism is the conflict of interests between common shareholders and preferred shareholders. Therefore, the prescribed rules should pursue the principle of balancing the interests between common shareholders and preferred shareholders. As such, the legislation should restrict the application of voting rights revival and voting by classes; and should fully utilize the appraisal rights for dissenting shareholders; and should stress the obligation of the board to provide equal protection to the interests of common shareholders and preferred shareholders while performing its fiduciary duties.