The Legal Protection Of Preferred Stockholders’ Right

As an effective financial tool, preferred stock satisfies different kinds of investors with its flexible character and creates a pleiotropic tool for corporate governance. However, preferred stockholders are so vulnerable that the legal system completion of the preferred stock somewhat depend on the development of the protection of preferred stockholder. As the cradle of the preferred stock, the US and the UK come into being a mature protection system based on case law and statute. For the civil law countries such as German and France, also constitute a comprehensive legislation. However in China, imported in 20 centry 90 years, preferred stock only has no more than 30 years history and develops slowly. As for the protection of the preferred stockholders, the protection system is too weak to protect their rights. After the issuing of "State Council guidance on carrying out the pilot’s preference shares" in 2013, the SFC issued a "Preferred pilot management approach" which made certain provisions for the protection of the rights of preferred shareholders, compared with the previous laws and regulations, it has great progress. But compared with Western countries’ system, there are still large gap.With its stable income and the limitation on voting right, the preferred stock attracted both investors and financers. So the right of gain profits is the key competent of the preferred rights. From the aspect of the shareholders’ rights protection, this paper goes deep into the influenced case law and statute about preferred stockholders protection in the US and concentrated in the protection in interest distribution and benefits adjustment system. Because of the limitation of the words and the rich content of the topic, I cannot go far into the details too much so I enumerate some typical situation in which the preferred shareholders are vulnerable. Combined with the US experience and the detailed analysis the case law, I intend to provide some references to our country’s legal institution in the protection of preferred stockholder.The introduction part briefly describes the broad applicability of preferred stock in the international area and its development in our country. From the analyzing of the shortage of protection preferred shareholders’ right in our current legal system, which raised the importance of protecting the right to preference shareholders. Secondly by comparing literature review of scholars’ domestic and abroad, we conclude that the importance of learning from foreign experience and so that leads to the research direction of the article.The first chapter introduces the concept and the property of preferred shareholders’ right. Proposed the idea that the right of preferred shareholders is both with the natural of shareholders’ right property and contractual property. Second, analyze the impact of the rights of preferred shareholders on corporate governance, focusing on the influence of institutional shareholders and board of directors to improve the system for the protection of the rights of preferred shareholders. Separate vote mechanism is of great importance in the protection of shareholder rights. The board’s fiduciary duties and their business judgment norms also influenced shareholders’ rights. From the duties of the board of supervisors, describe the Board of Supervisor’s affection to shareholders’ rights.The second chapter discusses the preferred shareholders’ right in company’s interest’s distribution mechanism. Concentrated on dividends and surplus property distribution, analyze the cases of the distribution of preferred stock rights infringement. Firstly cited the situations of infringement preferred stockholders’ right on dividends: no distribution of dividends, the dividend adjustment and the cancellation of the cumulative dividends. According to US judicial practice, a prior provision in the contract is the most effective way to protect the shareholders’ rights. In distribution of the remaining property, the main forms of infringement of preferred shareholders’ right are no distribution of surplus property and dividends eliminated in the remaining property. In most countries, the preferred shareholders enjoy the allocation right of surplus property. However, in British unless expressly stated, preferred shareholders do not enjoy a distribution of surplus property. As for weather the accumulative dividend should include in the surplus property, different country may has different regulations and judicial practice.The third chapter discusses the preferred shareholders’ rights protection in the interests’ adjustment mechanism. There are many ways to adjust shareholders’ interests, taking into account the degree of influence on the rights of preferred shareholders, the author mainly analyzes the capital increasing, capital reduction, capital restructuring. Of all those situations, the issuance of a higher level of preference shares, the repurchase of preference shares and the merge and separation of a company are of direct significant impact on preferred stockholders’ right. In the repurchase of preferred shareholders, the right to repurchasing and objections related to the repurchasing is of most important in the repurchase process. Issuing a higher level preferred stock is of more impact on the rights of preferred shareholders than that of other shareholders. So they should be provided preemption purchase right. Mergers and separation are the legal rights of a corporation, in case of the infringement preferred stockholders’ right, adequate relief including a separate vote must be provided. As the statutory right, adjusting the interest may also cause the infringement of certain rights of shareholders. Therefore, adequate relief including a separate vote must be provided.Conclusion section is the summary of the full text. By analyzing the relationship between the interest’s distribution mechanism the interest’s adjustment mechanism, try to conclude the characters of protection of the preferred shareholders’ rights both in the civil law countries and common law countries.