Issuance of Preference Shares and Rights Attached

  1. Preference shares are shares which confer special rights to their holders. Indicatively, such special rights may include preferred rights to dividend, return of capital on winding up and increased number of votes during a general meeting.
  2. It is noted that the precise nature and scope of the special rights attached to the preference shares are set out in the Articles of Association of the company. We set out below a brief description of the examples of special rights we have indicated in paragraph 1 above.
    1. Preferred rights to dividend mean a right of a holder of preference shares to receive dividend payment before the payment of dividends to a holder of ordinary shares.
    2. A special right with respect to the return of capital on the winding up of the company means that the holder of such preference shares would have capital repaid to him in priority of the holders of ordinary shares.
    3. A special right with respect to the number of votes could mean for example that one preference share carries 2 votes while an ordinary share carries 1 vote.

Redemption of Preference Shares

  1. Pursuant to Article 57 of the Companies Law (Cap. 113) (the “Law”) a company may if so authorized by its articles, issue preference shares which are, or at the option of the company or of the shareholder are to be liable, to be redeemed. Therefore, provided that a company’s Articles of Association allow it, and the requirements set out in Article 57 are satisfied then the company my issue redeemable preference shares. The Article 57(1) requirements include indicatively the following: (i) redemption can only be made out of profits or the proceeds of a fresh issue made for the purpose of redemption; (ii) only fully paid shares can be redeemed; and (iii) the premium, if any, payable on redemption, must have been provided for out of the profits of the company or out of the company’s share premium account before the shares are redeemed.
  2. It is noted that the redemption of preference shares, as set out in paragraph 3 above, can be effected on such terms and in such manner as may be provided by the Articles of Association of a company. It is noted that a redemption of preference shares pursuant to Article 57 of the Law, shall not be taken as reducing the amount of the company’s authorized share capital, as this is provided by Article 57(3) of the Law.

Ranking Priority in the Event of Liquidation

  1. Article 300 of the Law sets out the ranking the claims in a liquidation process and determines their preferential status. In a winding up ordered by the court, the ranking of priority is as follows:
    1. liquidation costs as per Article 300(4);
    2. preferential debts – including all Government taxes and duties that on the relevant date (as this is defined in Art. 300(6)(b)) and which have become due and payable within 12 months before the relevant date (Art. 300(1)(a)).
      The above may also include any salary due to employees of the company, any other sum or benefit of the employee that arises as a result of an agreement or employment relationship (Art. 300(1)(b) and compensation for injuries (Art. 300(1)(c)); annual leave payment owed to an employee (Art. 300(1)(d));
    3. creditors secured by a floating charge;
    4. unsecured creditors; and
    5. any deferred debts, such as amounts owed to shareholders in the form of dividends declared but yet to be paid

It is stressed that all the debts mentioned above have equal priority and must be paid in full.

  1. Finally, following the payment of all debts as per the above, in the event there is any surplus this will be distributed to the shareholders in accordance to each shareholder’s rights
  2. In the event that the liquidation is voluntary then the creditors are paid in line with the agreed terms and conditions. The rights of the secured and preferential creditors, however, remain intact and will not rank lower than those of the unsecured creditors.
  3. In the event of liquidation the ranking of priority of preference shares, will be determined by the terms on which they were issued. Therefore, taking into account the examples given above, If the said preference shares have been given priority to return of capital, these shares are arguably a more secure investment than ordinary shares, as they are more likely to have capital returned even where there is capital insufficient for the payment of all shareholders.
  4. With respect to a shareholder petitioning for the protection of the court and the appointment of an examiner pursuant to Article 202B of the Law, it is noted that a petition to the court by a shareholder can only be made if the shareholder holds at least 10% of the paid-up share capital of the company, pursuant to Article 202B(c) of the Law.

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