Understanding the Impact of Issuing Preference Shares under the Companies Act 2016

In the dynamic world of corporate finance, preference shares (or preferential shares) offer companies a flexible instrument to raise capital while balancing ownership and control.

In Malaysia, the issuance and treatment of preference shares are governed by the Companies Act 2016 (CA 2016), which allows for various types and rights attached to such shares.

This article explores how preference shares affect the corporate landscape of Malaysian companies—financially, structurally, and strategically.

INTRODUCTION

What Are Preference Shares?

Preference shares are a class of shares that provide holders with certain preferential rights over ordinary shareholders. These may include:

• Priority in dividends (fixed or cumulative).
• Preference in asset distribution upon winding up.
• Limited or no voting rights, unless specified.

The terms must be clearly outlined in the company’s constitution or in a shareholders’ agreement, and properly lodged with the Companies Commission of Malaysia (SSM).

1. Alternative Capital Raising Without Diluting Control

One of the most significant impacts of issuing preference shares is that it allows a company to raise capital without necessarily giving up voting control. Since many types of preference shares do not carry voting rights (unless dividend payments are in arrears or specified conditions are triggered), founders and original shareholders can retain control of the company while still attracting investment.

This is especially attractive for:

• Family-owned businesses.
• Start-ups and SMEs seeking strategic capital.
• Companies preparing for listing or expansion.

One of the most significant impacts of issuing preference shares is that it allows a company to raise capital without necessarily giving up voting control. Since many types of preference shares do not carry voting rights (unless dividend payments are in arrears or specified conditions are triggered), founders and original shareholders can retain control of the company while still attracting investment.

This is especially attractive for:

• Family-owned businesses.
• Start-ups and SMEs seeking strategic capital.
• Companies preparing for listing or expansion.

2. Strengthening Financial Stability and Liquidity

By issuing non-redeemable or redeemable preference shares, a company can shore up its capital structure without taking on debt. This provides:

• Better debt-to-equity ratios, improving financial statements.
• Predictable dividend obligations compared to fluctuating equity returns.
• Greater appeal to investors who prefer fixed returns with lower risk exposure.

The structured and often fixed nature of preference share dividends also helps companies manage cash flows more predictably than equity profit distributions.

3. Strategic Use in Corporate Structuring and M&A

Preference shares can play a crucial role in mergers and acquisitions, restructuring, and joint ventures. For instance:

• In acquisitions, preference shares can be offered as part of a deferred consideration package.
• In group restructuring, preference shares may be used to retain some economic interest in a subsidiary without full ownership.
• In joint ventures, preference shares provide a way for investors to secure returns without operational involvement.

This flexibility makes preference shares a versatile tool in complex corporate transactions.

4. Governance Considerations and Shareholder Rights

While preference shareholders typically enjoy limited voting rights, Section 90 of the Companies Act 2016 provides that any variation of class rights (such as dividend changes or conversion rights) requires approval from affected shareholders.

This means companies must:

• Ensure clear documentation and transparency in the terms.
• Avoid potential disputes by communicating effectively with preference shareholders.
• Be aware of how preferences may affect corporate governance dynamics, particularly if the company faces financial distress or changes in control.

5. Potential Impact on Ordinary Shareholders

Issuing preference shares can affect the rights and value of ordinary shareholders, especially when:

• Preference dividends reduce profits available for ordinary dividends.
• Preference shares are convertible and may dilute equity in the future.
• Redemption rights or cumulative dividend arrears create financial obligations.

While preference shares provide capital advantages, they may limit the company’s flexibility in distributing earnings or managing its balance sheet—something directors and Company Secretaries must weigh carefully.

6. Regulatory and Compliance Obligations

Under CA 2016, a company must:

• Clearly state the rights attached to preference shares in its constitution (Section 71).
• Obtain shareholder approval for certain classes or terms.
• Comply with SSM filing requirements for share issuances and changes.

A qualified Company Secretary plays a key role in ensuring compliance, especially in documenting class rights, facilitating shareholder meetings, and advising the board on implications of issuing or redeeming preference shares.

Conclusion

Preference shares are more than just a financing tool—they are a strategic instrument that can reshape a company’s ownership, governance, and financial framework. In Malaysia, where CA 2016 provides a flexible legal framework, companies have significant leeway to structure preference shares creatively.

However, this flexibility must be balanced with sound governance, legal compliance, and transparency. When used thoughtfully and managed well—with guidance from legal advisors and Company Secretaries—preference shares can positively transform the corporate landscape, helping companies achieve capital efficiency without sacrificing long-term control or integrity.

Comparison of Ordinary vs. Preference Shares

(Malaysia – Companies Act 2016)