The issuance of dividend preference shares (“CPUDCT”) are becoming more and more popular in the market and are of interest to many experienced investors. This type of share is issued with the purpose of generating good profits for the holders, so it can encourage large, reputable investors to invest in potential companies that need capital for development. On the other hand, companies also want to use CPƯĐCT as an optimal means to mobilize debt capital at a cheaper cost while not adversely affecting the company’s financial safety ratio because CPƯĐCT (if meeting a number of specific conditions in accordance with the Vietnamese accounting standards system) can be identified as a type of equity security in the company’s balance sheet.

To explain what CPƯĐCT is, it can be simply understood that shareholders owning CPƯĐCT have the right to receive a higher dividend rate[1] than ordinary shareholders. Clause 1, Article 117 of the Enterprise Law No. 59/2020/QH14 (“Enterprise Law 2020”) clearly defines this definition. Specifically, this benefit includes:

• Fixed dividend: Shareholders owning preferential shares will receive fixed annual dividends, regardless of the company’s business results. This dividend level is specifically determined and clearly stated in the shares issued to shareholders.
• Bonus dividend: In addition to fixed dividends, shareholders owning preferential shares are also entitled to receive bonus dividends, depending on the company’s decisions and the success of implemented projects or business strategies. The bonus dividend level is also clearly stated in the shares.

Shareholders owning preferential shares have other rights as common shareholders except for the rights including: voting, attending the General Meeting of Shareholders (“General Meeting of Shareholders”), nominate people to the Board of Directors (“Board of Directors”) and the Board of Supervisors. In case the company goes bankrupt or is dissolved, shareholders owning preferential shares will have priority in receiving liquidation proceeds before common shareholders after all financial obligations have been paid.

In the process of providing legal advice to a listed company issuing shares, we have found that there are a number of important legal issues that need attention as follows:

• In addition to the rights associated with CPƯĐCT as mentioned above, in practice, depending on the capital market situation and the position of each party participating in the transaction, investors may request additional commercial conditions. These conditions will not be associated with CPƯĐCT stipulated in the Company Charter and shares issued to shareholders. In this case, investors will request to establish a number of specific transactions with related parties to achieve these commercial conditions and stipulate this as one of the prerequisites for investors to participate in the transaction.
• Two of the conditions for issuing Preferred Shares are the issuance plan and the use of the proceeds from the Preferred Shares offering; clearly defining the criteria and number of investors that must be approved by the General Meeting of Shareholders; the Company Charter may have to be amended to include provisions on the type of Preferred Shares. Obtaining the opinion of the General Meeting of Shareholders of a listed company will have to be carried out through many steps: (i) The Board of Directors approves the closing of the list of shareholders to obtain opinions; (ii) requesting the closing of the list of shareholders with the Vietnam Securities Depository and Clearing Corporation (“VSD”).VSD extension”); (iii) prepare and send meeting invitation documents or collect shareholders’ opinions; (iv) collect shareholders’ opinions and issue the corresponding resolutions of the General Meeting of Shareholders… Therefore, when planning to carry out transactions (including plans to prepare and use capital), the company needs to reserve a necessary amount of time for this as well as need to fully identify the issues that need to be consulted with the General Meeting of Shareholders to ensure that this only has to be done once.
• The Company will have to register the private offering of its preferred shares with the State Securities Commission (“SSC”).SSC”) and are only allowed to issue Preferential Shares after receiving written confirmation from the State Securities Commission. In practice, the process of seeking shareholders’ opinions and negotiating with investors will often be carried out simultaneously, so there may be commercial contents in the Preferential Shares issuance plan that have not been agreed upon with investors at the time of seeking shareholders’ opinions. In this case, the General Meeting of Shareholders needs to authorize the Board of Directors to determine/approve a number of specific issues within a reasonable scope to avoid having to resubmit the missing issues to the General Meeting of Shareholders for approval.
• Ordinary shares cannot be converted into Preferred Shares. On the other hand, shareholders owning Preferred Shares can be allowed to convert them into ordinary shares according to the decision of the General Meeting of Shareholders and put them into trading on the stock exchange where the company’s shares are listed. In case the potential investor is a foreign individual/organization, the company will have to apply for registration to adjust the foreign investor ownership ratio for the company’s stock code that is allowed to be traded on the stock market to ensure that in the future when Preferred Shares shareholders exercise the right to convert them into ordinary shares, the company still has room to issue ordinary shares to investors as committed.
• After the Preferential Shares are issued to investors, the company will have to complete the procedures for registering additional securities for these Preferential Shares at VSDC. The company is only allowed to register one stock code for common shares to be allowed to trade on the stock exchange. Therefore, when there is a need to transfer Preferential Shares in reality, shareholders cannot transact directly with the buyer but will have to complete the procedures with the company and must do so on the basis of registration with VSDC.

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[1] Clause 5, Article 5 of the Enterprise Law 2020: Dividend is the net profit paid per share in cash or other assets