Preference shares: key advantages of preference shares in a corporate capital structure
In the context of the growing market economy, the construction of a flexible and efficient capital structure is of great significance for joint stock companies. According to the Law on Enterprises 2020 amended and supplemented in 2025 (“Law on Enterprises”), a company’s capital structure is not limited to ordinary shares but can also be diversified through the issuance of preference shares. This is a legal tool that assists enterprises in raising capital while maintaining control in corporate governance.
1. Concept and legal nature of preference shares
1.1. Concept
Although the Law on Enterprises does not expressly define preference shares, based on its legal nature, preference shares may be understood as shares issued by a joint-stock company to shareholders who are granted priority rights regarding voting, dividends, capital redemption, or other rights as prescribed by law and the company’s Charter. However, along with these preferential rights, shareholders holding preference shares may be subject to certain restrictions under the Law on Enterprises.
1.2. Legal nature of preference shares
From a legal and corporate governance perspective, preference shares are considered a special type of capital contribution asset. The nature of these shares is reflected in the following aspects:
• Differentiation of rights and interests between groups of shareholders: Shareholders holding preference shares may enjoy special rights regarding dividends or voting but are simultaneously subject to certain restrictions in participating in the management and operation of the company.
• Clear legal basis: The contents of rights, obligations and conditions applicable to each type of preference shares are directly stipulated in the Law on Enterprises and specified in the company’s Charter to ensure transparency and practical applicability.
• Mechanism for structuring shareholder rights: In corporate governance activities, preference shares are used as a legal tool to distribute power and benefits among groups of shareholders, thereby supporting businesses to be flexible in raising capital and maintaining stability in corporate control and governance.
2. Classification and legal characteristics of preference shares
Based on the purpose of issuance and holders, the enterprise law clearly classifies three typical groups of preference shares as follows:
(i) Voting preference shares (Article 116 of the Law on Enterprises)
It is a type of share with more votes than ordinary shares, the number of votes of a voting preference share is prescribed by the company’s Charter. Unlike dividend and redeemable preference shares which are associated with property interests, voting preference shares represent preferential rights in terms of corporate governance and control, creating a significant advantage in approving decisions of the General Meeting of Shareholders.
In terms of legal characteristics, the Law on Enterprises restricts the categories of persons entitled to hold voting preference shares in order to limit the prolonged concentration of power in the company. Accordingly, only founding shareholders and organizations authorized by the Government can hold this type of shares. For founding shareholders, the voting preference is only valid for a period of 03 years from the date the company is granted the Enterprise Registration Certificate, after this period, the voting preference shares will be automatically converted into ordinary shares. At the same time, voting preference shares are not allowed to be transferred, except where transferred pursuant to a legally effective court judgment or decision or inheritance.
In essence, voting preference shares are legal tools to consolidate and maintain control of the enterprise for the founding shareholders or entities that play a key role in the company’s strategic direction. This mechanism contributes to ensuring stability in the development orientation and corporate governance at the early stage of operation, especially when the enterprise needs to raise additional capital from external investors but still wants to maintain decision-making power over the core issues of the enterprise.
(ii) Dividend preference shares (Article 117 of the Law on Enterprises)
These are shares that entitle the holder to a higher dividend than ordinary shares or guarantee a stable annual dividend. Dividends include fixed dividends and bonus dividends; in particular, fixed dividends do not depend on the company’s business results.
In terms of legal characteristics, shareholders owning dividend preference shares do not have the right to vote, attend the General Meeting of Shareholders, or nominate candidates to the Board of Directors and the Supervisory Board, except in cases where the General Meeting of Shareholders includes resolutions that adversely change the rights and obligations of shareholders owning dividend preference shares as prescribed in Clause 6, Article 148 of the Law on Enterprises. This regulation reflects the principle of balancing financial interests and the right to participate in management in joint-stock companies.
From a financial and legal perspective, shareholders who own dividend preference shares are prioritized to enjoy stable profits from the company’s business activities. This type of share is suitable for a group of investors who prioritize financial benefits over the right to participate in corporate governance, while simultaneously helping the company to expand its ability to raise capital without disrupting its stable internal control structure.
(iii) Redeemable preference shares (Article 118 of the Law on Enterprises)
These are shares for which the contributed capital is refunded by the company at the request of the owner or according to the conditions stated in the redeemable preference share certificate and the company’s Charter.
In terms of legal characteristics, shareholders owning redeemable preference shares do not have the right to vote, attend the General Meeting of Shareholders, or nominate candidates to the Board of Directors and the Supervisory Board, except in cases where the General Meeting of Shareholders votes on changing the type of shares according to Clause 5, Article 114 of the Law on Enterprises or makes decisions that adversely affect the rights and obligations of redeemable preference shareholders as prescribed in Clause 6, Article 148 of the Law on Enterprises. The issuance of this type of share creates a financial obligation for the company, whereby the enterprise must ensure the ability to refund the capital when shareholders exercise redemption rights according to the committed conditions.
From a financial – legal perspective, although redeemable preference shares are recorded as the company’s Charter capital, in essence, such shares have the characteristics of capital that is likely to be repaid in the future. The use of this type of shares requires enterprises to build appropriate financial management and cash flow balancing mechanisms to ensure the ability to return capital while maintaining stability in business activities.
3. Strategic advantages and benefits of preference shares in the corporate structure
From a legal and corporate governance perspective, preference shares are a tool to help joint stock companies be flexible in raising capital, allocating management rights and balancing interests among groups of shareholders. The use of preference shares according to Article 114 of the Law on Enterprises contributes to creating the following strategic advantages for enterprises in the process of operation and development as follows:
3.1. Optimizing capital raising capacity and maintain control of the business
One of the important requirements of businesses when raising capital is to ensure a balance between the need to increase financial resources and the maintenance of control of the founding or dominant shareholders. In that context, the issuance of dividend preference shares or redeemable preference shares under the provisions of Articles 117 and 118 of the Law on Enterprises is considered an effective legal solution.
This mechanism helps businesses expand their access to groups of investors who prioritize the stability of profits through preferential dividends or redemption mechanisms instead of participating in corporate governance. At the same time, because these types of shares generally do not carry voting rights at the General Meeting of Shareholders, the enterprise can increase its charter capital while maintaining a relatively stable internal power structure. This mechanism has special significance for family businesses and start-ups, where long-term control and direction play an important role.
3.2. Flexibilizing of financial structure, minimization of credit pressure
The issuance of redeemable preference shares contributes to building a more flexible financial structure than traditional debt financing methods. According to Article 119 of the Law on Enterprises, the company can agree in advance with investors on the conditions and time for refunding the contributed capital, thereby proactively building a mechanism to use capital in accordance with the operational needs and financial strategy of the enterprise.
Compared to loans from credit institutions, capital is often associated with collateral requirements, periodic interest payment obligations and strict payment pressure, capital mobilization through redeemable preference shares allows businesses to reduce the pressure of periodic interest payments. At the same time, this mechanism also contributes to improving cash flow balancing and limiting the risk of insolvency in the short term.
From the perspective of corporate governance, redeemable preference shares are a suitable tool for businesses in the period of scaling up or capital restructuring, when the need to mobilize financial resources is large but it is still necessary to maintain financial security and stability of business operations.
3.3. Establishing a mechanism to protect the control rights of founding shareholders
In the early stages of establishment, businesses may face the risk of losing control or losing their development orientation when receiving new investors. In that context, voting preference shares as prescribed in Article 116 of the Law on Enterprises are considered an important legal mechanism to protect the control rights of founding shareholders.
With more votes than ordinary shares, voting preference shares create conditions for founding shareholders to maintain the ability to decide on strategic issues of the enterprise such as amending the company’s Charter, restructuring the enterprise, choosing a governance model or long-term development orientation. This mechanism has special significance when the actual capital ownership ratio of the founding team gradually decreases after subsequent fundraising rounds.
At the same time, the fact that the law limits the subject entitled to hold voting preference shares and stipulates that the preferential period for founding shareholders only lasts for 03 years from the date of issuance of the Enterprise Registration Certificate shows the balance of the legislators between the requirement to protect the initial control and the principle of ensuring equality in the management of joint-stock companies.
3.4. Utilizing as strategic negotiation tools in mergers and acquisitions
In the practice of investment, mergers and acquisitions, preference shares are an important legal tool for designing transaction structures and allocating benefits among participants.
Financial investors or investment funds often prioritize owning dividend preference shares or redeemable preference shares to ensure capital recovery and maintain a stable level of return. Meanwhile, the founding group or executive shareholders usually maintain the holding of ordinary shares or voting preference shares to ensure the right to decide on the management and operation of the enterprise.
This division mechanism contributes to the balance between economic interests and control of the business. Accordingly, investors are guaranteed financial benefits, while the founding team still maintains the ability to implement the company’s business strategy and long-term development orientation. Therefore, preference shares are considered a flexible negotiation tool, helping to improve the efficiency of capital mobilization and business restructuring activities in commercial practices.
From the above analysis, it can be affirmed that preference shares are an important legal tool in the operation of joint stock companies, contributing to supporting enterprises to raise capital, organize governance structures, balance interests among groups of shareholders and ensure stability in enterprise control.
Above is an article on “Preference shares: Key advantages of preference shares in a corporate capital structure”. In case businesses need advice or support related to the issuance, management and use of preference shares, please contact TNTP for timely support.
