Analysis Upon Equity Governance Under System Of Preferred Shares

Corporate governance is the part of law practice field study which is to be explored constantly. For a long period, the distribution of the rights of shareholders and managers becomes focus of corporate governance, which is talking about the relationship between principal-agent and the trustee and how to prevent manager’s abuse mandate. But with the improvement of company system, the realization of shareholders’ rights and interests of investors value more. The "equality" of the dominant shareholders and minority shareholders on rights has become the focus of corporate governance. No matter the company law at home or abroad, company laws all attach great importance to the equality of shareholders’ rights. Big shareholders can enjoy controlling power to company due to ownership control, but minority shareholders can’t. In this paper, the author will talk about the "rights balance" and distinguish " rights equaling" and "rights balancing" to explore the key to corporate governance. She will also try to use quantitative relation to give a criterion for "power balance". In early theory, common shareholders should enjoy equal rights no matter big shareholders or minority shareholders. Of course, if the shares are different, shareholders should enjoy different rights. We cannot enforce the same. So we can only discuss corporate governance from the perspective of "balance", and this will be a new subject in company equity governance. The criterion of "rights balancing" can be understood according to the analysis of quantitative relation. The author divides the rights of investors into "benefit" and "right". "Benefit" means bonuses that the investors enjoyed and "right" means the voting rights using for company management..If the sum in "benefit" and "right" of investors in different kinds is still same, we should say corporate governance is reasonable and equity governance play the role of the corporate governance.China Securities Regulatory Commission(CSRC) announced the pilot measures for the administration of preferred shares(hereinafter referred to as the "measures") on March 21, 2014, which "measures" will bring China into preferred shares pilot stage. Preferred shares, as a kind of special shares into company, will change the company’s equity structure, and conflicts between preferred shareholders and common shareholders will further lead to corporate equity governance issues. In such a special period, in this paper the author attempts to stand in the angle of a company and try hard to think how to make full use of the system of the preferred shares to perfect equity governance. The author tries to point out for the company issuing preferred shares that equity governance is the key to the corporate governance and an important part of the equity governance is to balance rights of preferred shareholders and rights of common Shareholders. The author also projects some valuable recommendations for equity governance which should be paid attention to, when company designing system of preferred shares, such as shareholders’ rights organization setup, corresponding improvement of the board of directors, different proportion of shares issued, shareholders redemption, conversion rights, etc.Company issues preferred shares during Current period in one hand to solve the problem of financing difficulties and on the other hand to solve struggles for shareholders’ control problems. However, in the same time, company should prevent the emergence of new situations so that how to design the system of preferred shares, how to balance right between common shareholders and preferred shareholders will be the important content of company equity governance. Though, the design of the system of preferred shares still stay in the pilot measures for the administration of the preferred shares issued by the CSRC and the content of the “measures” is not very detailed, as an important way of pilot stage, the design of the system of preferred shares in the future will play a guiding role to direct the legislation on the basis of this “measures”.Although in this paper the author takes how to prevent problems of control between shareholders as a clue to introduce the system of preferred shares, but preferred shares system also has a positive role in corporate governance, breaking through the financing difficulties, deepening the reform of the state-owned corporation and the development of capital market. Introducing preferred shares makes change of the company’s shares construction and will essentially change structure of ownership, because as the basis of a company capital, shares adds from one to two. Balancing two shares is the key to make preferred shares play a role in equity governance. Therefore, the author will try to discuss the following company governance issues from the balance preferred shareholders and common Shareholders:First, the essence of corporate governance is the equity governance. Although before issuing preferred shares, the equity governance mainly concentrates between controlling shareholders and minority shareholders, during current situation, the equity governance should be transformed into the governance of the common share holders and preferred shares holders. Preferred shares and common shares as a company’s basic share, the holders of both should enjoy equal rights which are composed of "benefit" and "power". A reasonable balance for the quantity of "benefit" and "right" will prevent conflicts between share holders. Therefore, the right balance is an important part of the equity governance.Second, after clearing the articles of association as the subject of the preferred shares holders’ rights, we think that reasonable design in the articles of association and the company law which will bear shareholders’ rights is the basic ideas of governance of equity. The most significant characteristics of preferred shares are more "benefit” but less “power”. Shareholders cannot save themselves out of trouble because of the limited “power”. Therefore, preferred shareholders rights must be carefully designed first to reflect the content of the rights of the two different shares and on the other hand also to consider the checks and balances of both equities.Third, equity governance involving the preferred shareholders will be further discussed in the following parts:In this paper we first discuss the management decision-making power of preferred shareholders. Because of the limit in decision-making power of preferred shareholders, a preferred shareholders general meeting shall be established to provide a platform for preferred shareholders to make comments upon company managements; a preferred shareholders general meeting will prevent common shareholders from absolute control on board of directors so that the functions of the board of directors shall not be ignored. A preferred shareholders general meeting shall have rights to appoint a certain directors for the board of directors. The directors chosen by the preferred shareholders will also supervise and urge the diligent duty of the board of directors.Second in this part, preferred shares proportion shall be discussed. We think that the proportion of preferred shares can not too high, so the company should design moderate amounts of convertible preferred shares and redeemable preferred shares. When the ratio of preferred shares is too high, preferred shareholders can convert preferred shares into common shares or other securities according to predetermined prices and reasonable way. The company can also redeem some preferred shares to ensure the reasonable proportion of preferred shares and common shares.Another in this part, whether preferred shareholders enjoy voting rights should be discussed separately. We think preferred shareholders certainly enjoy voting rights inside the preferred shareholder meeting. They can vote for two situations: first for preferred shareholders-own issues and second for classified voting. Preferred shareholders also can vote in common shareholders’ meeting for one situation- the relief of preferred shareholders. when the company can’t timely pay "benefit" to preferred shareholders, preferred shareholders can jointly with the common shareholders participate in the common shareholders’ meeting, until the company will pay shareholders "benefit" in full.Finally in this part, we clear that the rights of the preferred shareholders must be more than above rights of preferred shareholders. As the company’s investors, any investor should enjoy the general rights, and the rights shall be designed according to common shareholders.Through the discussing of the preferred shares system, we conform the positive significance for equity governance of company and the positive role to the development of the entire capital market. The emergence of new things tends to be the embodiment of the new requirements. The issuance of preferred shares will solve the problem of financing, the problems of control conflict and company equity governance. Therefore, reasonable solutions should be put forward to perfect company equity governance on the premise of exploring and thinking over preferred shares system.