A Study On The Legal System Of Preferred Stock Financing

Preferred stocks have both attributes of bonds and shares.The advantage of preferred stocks is that preferred stockholder can be preferentially allocate the company's profits and surplus assets,which meets the needs of investors.Preferred stock financing has become an important way for start-ups financing and refinancing of listed companies.At the same time,it also can optimize corporate governance structure,balance investors' interests and help resolve conflict arising from the exit of preferred stockholder.This paper is divided into four chapters.Firstly,it collects and sorts out the existing legal regulations for preferred stock financing,clarifies the value and function of preferred stocks,and analyzes the domestic and foreign preferred stock financing profiles.Secondly,interlinking the existing legal system with financing practices,it explores and explains the issue,trading and exit system of preferred stocks.Finally,based on summarizing the experience and deficiencies,it expounds the mechanisms of investor protection and balance of interest in preferred stock financing.The main contents of each chapter are as follows:The first chapter summarizes the practice and legal regulation of China's preferred stock financing.This chapter takes Xiaomi's listing on the Hong Kong Stock Exchange as an entry point,introduces the significance and value of preferred stock financing through Xiaomi's pre-IPO preferred stock financing,and explains the impact of preferred stock financing on the financial status of the company.In May2018,with the successful listing of Xiaomi on the Hong Kong Stock Exchange,preferred stock financing attracted people's attention once again.Prior to the listing,Xiaomi received huge sums of money through six rounds of convertible and redeemable preferred stocks.The preferred stocks provided new options for corporate financing other than issuing bonds and common stocks,and even slowed down the company's demand for listed financing.At the same time,however,the convertible and redeemable preferred stocks have also a significant impact on Xiaomi's financial position.Under the International Accounting Standards,convertible and redeemable preferred stocks are reflected in Xiaomi's huge losses,and once the preferred shares are removed,Xiaomi makes a profit instead of suffering a loss and the net profit even doubled.Secondly,according to the preferred stock financing information disclosed by various stock exchanges at home and abroad,the second section of this chapter has compiled an overview of preferred stock financing.For domestic preferred stock financing,Chinese corporations all adopted non-public offering and listed companies issuing preferred stocks are mostly commercial banks,while those listed in the national stock transfer system are mainly non-commercial banks.For the overseas preferred stock financing,such as Xiaomi Company,Meitu Company,US Chesapeake Energy and BD Company,the methods of overseas preferred stock issuance include public offering and non-public offering,and the they have diverse types of preferred stock.The last section of this chapter summarizes the legislative evolution and general situation of China's preferred stock before and after the revision of the company law in 2005.The second chapter discusses the issuance of preferred stock.Combing with China's current Company Law,Guiding Opinions of the State Council on Piloting Preference Stocks,Practical Management Measures for Preference Stocks and other relevant legal documents,this chapter interprets and demonstrates the issuer,the purchaser,methods of issuance and information disclosure of preferred stocks.On this basis,it summarizes the shortcomings of the existing preferred stock issuance system.In terms of issuers,the public offering of preferred stock is only applicable to some well-developed and stable listed companies.Non-public offerings are onlyapplicable to public companies,which limits the market issuance of preferred stocks,and deviating from the original intention of designing preferred stocks for start-ups.In terms of purchaser,non-public offering is limited to qualified investors,which has curbed the scale of preferred stock financing to some degree.In the long run,rationally expanding the scope of purchaser is also an effective way to develop preferred stock financing.In terms of issuance methods,the listed companies on the domestic exchanges all adopt non-public issuance methods.The Preferences for the Pilot Management of Preferred Stocks requires that the issuer adopting public offering must dividend the profit,which is one of the main reasons for the phenomenon above-mentioned;because of information asymmetry,information disclosure of preferred stock issuance is crucial for investors' investment decision-making and self-rights protection.The Guiding Opinions of the State Council on Piloting Pilot Stock requires preferred stock issuers disclose information truly,accurately,completely,timely and fair.The second section of this chapter selects countries such as the United Kingdom and the United States with better development of preferred stocks as comparative research objects.The last section of this chapter examines the equal rule of stock rights,the level conflict between preferred stockholders and common stockholders and the vertical conflict between preferred stockholders and management.The equal rule of stock rights requires shareholders to enjoy equal treatment according to the nature and amount of the shares they hold based on their shareholder qualifications.With the continuous development of the company law,the principle pays more attention to substantive equality.Preferred stockholders have priority in distributing at the expense of voting rights.The value of the company's resources is limited,both the common stockholders and the preferred stockholders want to maximize their private interests,which inevitably creates conflicts of interest.In addition,the company's management has a fiduciary duty.When they act for the company's common interests,it's hard to balance the interests of common shareholders and preferred shareholders,which is the root cause of vertical conflicts between preferred shareholders and management.The third chapter discusses the trading and exit of preferred stock.This chapter first introduces the status quo of preferred stock trading and elaborates on the existing institutional conditions.In the securities market,there is an interactive relationship between securities issuance and securities circulation.The issuance of securities is the basis and premise of the circulation of securities.With the supply of securities in the issuance market,there is a securities transaction in the circulation market.In turn,the circulation of securities is the condition and internal motivation for the issuance of securities.Secondly,this chapter takes the cases of preferred stock financing as an analytical perspective and discusses the redemption and conversion of preferred stocks At the same time,it analyzes the conflicts of interest of the stakeholders arising from the redemption and conversion of preferred stocks and probes into how to balance the conflict.The redemption can be divided into mandatory redemption and optional redemption,and the latter can be divided into the issuer's choice of redemption and the investor's choice of redemption.According to the practical examples,the preferred stocks issued by domestic listed companies are all redeemable and non-returnable preferred stocks.A-share listed companies have strong financial resources and are in a strong position in the redemption arrangements of preferred stocks.The conversion of preferred stocks includes selective conversion and automatic conversion.In the present,enterprises are not allowed to issue convertible preferred stocks,while enterprises listed overseas are allowed.When a preferred stockholder converts his preferred shares into ordinary shares,the preferred stockholder becomes the company's common stockholder and lose all the rights and privileges of the preferred stockholders,but they will obtain the full voting rights of ordinary shareholders.The conversion of preferred shares will also bring direct negative effects to the original common shareholders,such as the dilution of common stock equity,the dilution of voting rights and weakening of corporate control.The capital maintenance principle restricts the company from retrieving its own shares.The share repurchase system in company law amended in 2018 provides a legal basis for the redemption of preferred shares.However,in practice,redemption of preferred stocks should be specifically regulated to protect the interests of creditors.The fourth chapter is about the perfect thinking of the legal system of preferred stock financing.This chapter corresponds to the chapters mentioned above,which also considers and discusses the improvement of the issuance,trading and exit system of preferred stocks,especially constructing the diverse paths of exit of preferred stock and alleviating the interest conflicts among the preferred stock financing.For the issuance of preferred stocks,this chapter proposes the possibility for non-public companies to issue preferred stocks.At the same time,the issuing scope of preferred stock will be expanded through reducing the threshold of preferred stock investors,lifting restrictions on the public offering of preferred stocks by listed companies,and relaxing restrictions on the types of preferred stocks.In terms of procedures,liberalize the restrictions on continuous profitability of listed companies in the last three fiscal years and improve the information disclosure system.For the trading and exit of preferred stocks,it is necessary to improve the OTC market and further improve the Company Law,Securities Law and other regulations to ensure the orderly development of preferential stock OTC transactions.Improve information disclosure system and clarify the application about Article 86 of the Securities Law to protect the legitimate rights and interests of investors,especially preferred stock investors.Further regulate the accounting treatment of preferred stocks and emphasize the principle of substance over form to help investors make investment decision.The Jedwab Rule,deriving from the case,Jedwab v.MGM Grand Hotel,Inc.in the Delaware Chancery Court,requires that the priority issue involving preferred stock should be strictly judged in accordance with the provisions of the preferred stock contract,which can slow conflicts of all interested parties in the preferred stock financing and further protect the rights of preferred stockholders.In addition,perfect the class voting system and protect the appraisal rights of dissenters to enhance the protection of preferred stockholders.