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Macau: Preference shares explained

In line with most legal systems, Macau law also allows the issuance of preference shares as equity instruments, making them attractive both to issuers and investors in situations where the financing needs of the company should not disrupt an existing majority or the structure of the corporate power.

They are commonly described as instruments that allow for dissemination of the share capital while preserving the stability of the corporate power structure. This type of shares do not grant any voting rights but, as compensation, they grant a mandatory preference dividend in each financial year (which cannot be lower than five percent of the respective nominal value) as well as priority in the repayment of respective shares in case of liquidation. Except for the voting rights, preference shares include all the same other rights as ordinary shares. The subscribers of preference shares simply exchange their voting rights for the expectation of a stable financial return.

Preference shares, however, provide only a priority dividend, not a privileged dividend. Dividends have to be paid only if distributable profits exist and up to the limits legally allowed for the distribution of profits, thus qualifying as dividend and not as debt. To protect the investors against the potential non return of their shares, preference shares may be converted into ordinary shares (that is, voting shares) in the event the preferred divided cannot be paid for two consecutive years.

Preference shares can be issued as redeemable shares or non-redeemable shares, allowing therefore a time limit on their privilege. They are in any event treated as equity, as they form part of the share capital and can only be repaid out of the company's equity provided that the share capital and mandatory reserves are preserved intact after such payment.

Preference shares have been (successfully) implemented in certain large Macau corporations, such as Macau International Airport Company and Air Macau to restructure respective equity capital, as well as for venture capital investments. Often overlooked and sometimes misapprehended by auditors, preference shares are available and present themselves as valuable financing instruments under Macau law as well.

João Nuno RiquitoRui Filipe Oliveira

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