The Equitable Mechanism Of Preferred Stock Right Risks In Private Law

Preferred stock is a kind of financial innovation, because of its preferred rights, it is widely used by commercial banks and venture capital industries. The corporations can use the preferred stock to raise money in a fast way, while on the other hand, the stockholders have to sacrifice their voting rights in order to exchange the preferred payment right. Generally speaking, preferred stockholders and common stockholders have very different right system and interest demanding, which leads to the oppression of preferred stock by common stock in the company.“Dilutive Mergers”, “Leveraged Recapitalization” and “Risk-seeking Economic Strategies” are the three ways used to exploit preferred stocks. When facing this judicial trouble, the judgers adopt a dichotomy-protection-path: the case Jedwab give birth to this method. But the reality shows that this dichotomy-protection-path cannot provide adequate protection to the preferred stockholders. So, it is time to find some new way such like “searching for freedom in the contract”, “plan obligations at stock ” and “choosing voting right ”to change the “dichotomy path ” into a “pluralism” one, also combine the theory and practice together.This paper is divided into five parts, the first part is to explore the reasons why the preferred stock is widely used in commercial practices and the following disadvantage which preferred stockholders have that compared with common stockholders; the second part of the issue noted that there is widely existing a conflict of interest between preferred stockholders and common stockholders. As a result of this, the common stockholders use some strategies to make preferred stockholders in the risk. A series of related cases have shown that Courts cannot find an effective way to solve the problem, let alone providing adequate protection to the preferred stockholders; the third part shows that there are mainly three ways to protect preferred stockholders, and some American scholars have adjusted them to perform much better. Part five shows what company law and contracts law should do in terms of preferred stockholders protection. Preferred stock is booming in China, and I firmly believe that "the civilizations can be different, but the nature of them are the same". So it is time to connect foreign historical experience and private law together to find a proper way to balance preferred stock risk.