There is a growing trend in South Africa towards utilizing preference shares as a means of raising additional capital for financing private companies. Preference shares represent a distinct class of shares that are senior to ordinary shares while remaining subordinate to Company debt.
The specific rights associated with preference shares are outlined in the Company's Memorandum of Incorporation (MOI). There are no fixed requirements regarding the preferences attached to preference shares, allowing for flexibility in structuring.
Preference shares can exhibit characteristics of both equity and debt instruments. They often afford holders various rights such as fixed dividends (conditional on the Company's distributable profits), conversion rights to ordinary shares, and precedence in receiving proceeds during winding-up proceedings over ordinary shareholders.
Dividends on preference shares can either be cumulative, where unpaid dividends accrue and carry forward until fully paid, or non-cumulative, with no rights for future claims on unpaid dividends.
Typically, preferent shareholders do not have voting rights at general meetings except for specific circumstances, such as resolutions affecting their rights or winding-up decisions or if their dividends are in arrears.
Redeemable preference shares provide holders with the option to redeem their shares either upon request or under predefined conditions.
Importantly, issuing preference shares can be advantageous for founders and ordinary shareholders as it offers a means to get a cash injection/s without relinquishing control of the Company, provided their terms are met.