| As an innovative tool for China’s financial reform, preferred share is characterized in preference to common share in terms of distribution of profits and liquidation property, and under normal circumstances no rights to vote but make decision by participating in the general meeting of shareholders. It can be said that preferred share sacrifices a part of rights of management of the company to get the arrangement of preferred priority in property rights. Venture capital is characterized by its mode of operation with high-risk, and often invests in high-tech start-ups by way of private equity. The author believe that the combination of preferred share and venture capital are rational because on the one hand preferred share helps stabilize the operational control of start-ups, encouraging entrepreneurs to create value for the company, and on the other hand both parties can design their preferred share to meet the company’s needs with full respect for the company’s autonomy, by choosing different types of preferred stock and skillfully combining preferred share with other terms. In addition, preferred share offers dual protection of Contract Law and Company Law, and thus when compared with Valuation Adjustment Mechanism, preferred share’s legal risk is low.The United States is the country that has the highest level of development and the largest national market size of preferred shares in the field of venture capital. The vast majority of start-ups have adopted over the convertible preferred share as a financial tool. The market practice of preferred shares in China started in the 1980 s, and has gone through infancy period, exploratory period and development period so far. From the current situation of the issue of preferred shares in China’s market, most species of preferred shares are non-convertible, non-cumulative and non-participating preferred shares. In addition, the using of preferred shares mainly focus on banks, real estate and other fields, while the using in venture capital is in rare instances. This phenomenon may be due to the doubts in the vague margin of the rights of preferred shares, the exercise of voting rights of preferred shares and the recovery of voting rights of preferred shares and the uncertainty of tax treatment, thus causing investors’ hesitation in the process of weighing the risk of preferred shares.In order to confirm the above reasons, the author reviews China’s legal system of preferred share, including Company Law as upper law and other regulations and normative documents as inferior law. The legal obstacles in venture capital in current China’s legal system of preferred share are as follows. Firstly, there are problems of cohesion between high-level law and low-level law. To be specific, the provisions relating to the shareholders’ meeting in Company Law do not set aside room for the existence of preferred share. Secondly, there are unreasonable provisions in “the pilot measures for the administration of preferred share†with aspects to the species of preferred shares, the preferred shareholders’ meeting and the recovery of voting rights of preferred shares, so the interests of investors in venture capital is vulnerable and risky. Thirdly, the tax treatment of dividends on preferred share in China is not clear now, and if the dividends can not be deducted, the tax will greatly dampen investors’ motive of choosing preferred share.To solve these problems, the author checks the American Standard Commercial Law, the Delaware General Corporation Law and Japanese Company Code to learn the legal system of preferred share in United States and Japan, on the basic of knowing the history of the development of preferred share and the legislative history of preferred share in United States and Japan, and then sums up useful legislative experience that helps improve China’s legal system of preferred share. On the study of foreign legislation, the author put forward three proposals. Firstly, amend the relevant provisions in Company Law to eliminate the contradiction between high-level law and low-level law. Secondly, improve specific rules of preferred share by increasing the voting power through adding fallback circumstance provision, distinguishing the importance of voting matters, respecting the autonomy of the Article which allows the company setting special circumstances of restoring voting rights of preferred shares, and making clear the fiduciary duties of directors and managers. Thirdly, give preferred share some tax incentives to stimulate the use of preferred share in venture capital. |
