Protection Of Preferred Stockholders In Modification Of Articles Of Incorporation

Comparing with common stock, preferred stock is a kind of classified stock with priority allocation of profits and surplus property. Along with the reforming and promotion of the corporation legal system, the pilot work of preferred stock has been fully carried out, which emerging quickly in the stock market. Due to the comparative openness of preferred stock, the Article of Association will govern the rights of preferred stockholders. Although the shareholders know their right or have expect interest when formulating the Article of Association or reviewing it before join in the company, but once it changes, it is possible to make the preferred shareholders in uncertainty, and may lead to violation of their rights. Given that provisions about amending and modification of Article of Association in our current corporation law are still not comprehensive, this paper will analyze the rights of preferred shareholder in the process of revising in three parts, also the relief way when such kind of violation occurs.This first part discusses the substantive rights of preferred shareholders when revising the Article of Association. By classifying the issues to be modified according to the voting right of preferred stockholders. One is issue related to the preferred stock, the other is issue irrelevant to the preferred stock on which preferred stockholders having no voting rights. If the former is revised, preferred stockholder shall enjoy fully voting right. “Fully” hereby means the covering the whole process from the proposal before the board meeting to the resolutions of amendment, instead of just voting and reject. If the latter is revised, although on which preferred stockholders having no voting rights, they shall still having the right of inspection and the right to appeal in company’s interests. These are the inherent rights of shareholders. Otherwise, it will banned the preferred stockholders from the right to information of company and access to interest of it, and leads to the violation by controlling shareholders making the situation beyond the control. This is the urgent need of corporation practice to strengthen this part.The second part discusses the procedural rights of preferred stockholders in the process of revising the article. Modification program start from convening and notice of the board meeting until resolution being made. We should actively add the applicable rules for preferred stockholder based on existing system pursuant to the Corporation Law to distinguish the preferred and common and to improve the provisions of the procedure. The existing provisions are too simple to regulate the convening and notice for the purpose to protect the rights of preferred stockholders, which shall be clearly stipulated and restricted in various aspects.The third part discusses the four relief ways when the above rights of preferred stockholders are violated, including the revocation of the board resolution, voting rights restored, derivative suit and buyback of preferred shareholders. Revocation and derivative suit are available in current legal system, but special provisions applicable to preferred shareholders are needed to make them better; buyback claims under the agreed terms in article and voting rights restored are special ways only can be performed by preferred shareholders, which maintain unclear now. Four kinds of remedies fit to different circumstances and have different effects.In summary, this paper first defines the rights of preferred shareholders in the process of amending the article, then it refines the modified program and discusses different remedies for preferred shareholders. By explicitly various issues in the scope of rights, this paper further do a detailed analysis about how to modify the existing process of the shareholder conference. Combined with the provisions, this paper make it clear that meeting of amending the Articles of Association should consist of certain program elements, as well as the procedural rights preferred shareholders should have. Finally, the paper discusses three different remedies for preferred shareholders, including the right to appeal, the right to vote restored and rights of buyback. Limited extent of the right to vote and participate in the company’s preferred shareholders Remedy is also more limited, alternative ways to withdraw the resolution, or vote directly restore identity, after or proposed repurchase from the company, there are three ways to charter agreement, supplemental part of the constitution amended so relief itself closely with the charter rules, should arouse the attention of preferred shareholders. In view of preferred shareholders rights protection system, I hope our country can improve the laws and regulations in this regard as soon as possible, in order to realize the practice and promotion.