Distinguishing the Rights and Obligations of Common and Preferred Shareholders

The rights and Obligations of Common and Preferred Shareholders are legal regulations that define the position, role, and responsibilities of shareholders in the operation of a business. Common and preferred shareholders have fundamental differences based on the type of shares they own and the percentage of shares held. This article will detail the distinctions between the Rights and Obligations of Common and Preferred Shareholders, helping customers make informed investment decisions that align with their financial goals.

What are shareholders?

Shareholder is an important term in the field of business and finance, especially in the context of joint stock companies. A clear understanding of the concept of shareholders and their role in the business is necessary for anyone participating in this business environment.

Pursuant to the provisions of Clause 3, Article 4 of the Law on Enterprises 2020, shareholders can be understood as individuals and organizations that own at least one share of a joint stock company. Owning this share certifies the shareholder’s ownership of a portion of the company’s assets. A share is the smallest unit of equity that a company issues to raise capital from investors.

Shareholders can be classified based on the type of shares they own, including:

• Common shareholders
• Preferred shareholders

Rights and obligations of common shareholders

Common shareholders play a fundamental role in the ownership structure of a joint stock company. The Law on Enterprises 2020 has detailed regulations on the Rights and Obligations of Common and Preferred Shareholders as follows:

Basic rights of common shareholders

Article 115 of the Law on Enterprises 2020 specifically regulates the rights of common shareholders. Accordingly:

• Shareholders have the right to attend and speak at the General Meeting of Shareholders and vote directly or through an authorized representative or other forms prescribed by the company’s Charter and law, with the principle that each Common shares correspond to one vote. This voting right applies to all issues at the General Meeting, including electing members of the Board of Directors, approving financial reports and other important decisions of the company.
• Common shareholders have the right to receive dividends at the level decided by the General Meeting of Shareholders. This right depends on the company’s business results and development strategy.
• Shareholders have priority in purchasing newly offered shares corresponding to the percentage of ownership of common shares in the company, unless the General Meeting of Shareholders decides otherwise.
• Regarding the right to access information, common shareholders can review, look up and extract information about names and contact addresses in the list of shareholders with voting rights.
• They have the right to review, look up, extract or copy the Company Charter, minutes of the General Meeting of Shareholders and resolutions of the General Meeting of Shareholders. This right ensures transparency in corporate governance.

Obligations of common shareholders

Article 119 of the Law on Enterprises 2020 clearly stipulates the obligations of common shareholders as follows:

• The most basic obligation is to pay in full and on time for the number of shares committed to purchase.
• It is not allowed to withdraw capital contributed by common shares from the company in any form, except in the case of the company or another person buying back the shares. In case a shareholder withdraws part or all of the contributed share capital contrary to the provisions of this Clause, that shareholder and people with related interests in the company must be jointly responsible for the debts and obligations. other assets of the company to the extent of the value of shares withdrawn and damages incurred.
• Shareholders must comply with the Company’s Charter and Internal Management Regulations.
• Comply with resolutions and decisions of the General Meeting of Shareholders and the Board of Directors.
• They are responsible for protecting the confidentiality of information provided by the company according to the provisions of the Company Charter and the law. This obligation is especially important for sensitive information that could affect the company’s stock price and business operations.
• Other obligations according to the provisions of this Law and the company’s Charter.

Rights and obligations of preferred shareholders

Types of preferred shareholders

Article 114 of  the Law on Enterprises 2020 stipulates 4 types of preferential shares including:

• Voting preference shares;
• Dividend preference shares;
• Redeemable preference shares;
• Other preferred shares as prescribed in the company charter and securities laws.

Voting preference shares have more votes than common shares. The specific ratio is prescribed by the company charter. Only organizations authorized by the Government and founding shareholders are entitled to hold voting preference shares. The voting incentives of founding shareholders are valid for 03 years from the date the company is granted a Business Registration Certificate.

Voting rights and voting preference period for voting preference shares held by organizations authorized by the Government are specified in the company’s Charter. After the voting preference period, voting preference shares are converted into common shares.

Dividend preference shares are paid dividends at a higher rate than the dividend rate of common shares or at a stable annual rate. The specific dividend level is decided by the General Meeting of Shareholders and recorded in the company’s Charter. This type of stock is often attractive to investors looking for stable income.

Redeemable preferred shares are returned to the company’s capital contribution at the request of the owner or according to the conditions stated in the shares of redeemable preferred shares and the company’s charter.

Rights of preferred shareholders

Shareholders who own voting preference shares have the right to vote on issues under the authority of the General Meeting of Shareholders with the number of votes prescribed in the company’s Charter. However, they are not allowed to transfer those shares to others, except in cases of transfer under a legally effective Court judgment or decision or inheritance.

Shareholders who own dividend preference shares have the right to receive dividends at the level determined in the Charter or according to the decision of the General Meeting of Shareholders. They will also receive back a portion of the remaining assets corresponding to the number of shares contributed to the company, after the company has paid off all debts and preferred shares returned when the company dissolves or goes bankrupt.

Shareholders who own redeemable preferred shares have the right to request the company to return their contributed capital according to the conditions stated on the shares. In addition, preferred shareholders have other rights like common shareholders, unless otherwise stipulated in the company charter.

Legal basis: Articles 116, 117 and 118 of  the Law on Enterprises 2020

Obligations of preferred shareholders

Preference shareholders are obliged to pay in full for the number of shares they have committed to purchase. They are responsible for the company’s debts and other property obligations within the amount of capital contributed to the company.

Preferred shareholders are obliged to comply with the Company’s Charter and Internal Management Regulations. They must comply with the resolutions and decisions of the General Meeting of Shareholders and the Board of Directors. Preferred shareholders are responsible for keeping the information provided by the company confidential in accordance with the provisions of the company’s charter and the law.

Content specified in Article 119 of the Law on Enterprises 2020.

Consulting services related to common and preferred shareholders

Long Phan Company specializes in providing consulting services to shareholders and businesses. We advise in detail on the Rights and Obligations of Common and Preferred Shareholders according to  the Law on Enterprise 2020  and related legal documents.

Our consulting services include:

• Consulting on establishing joint stock companies;
• Develop Charter and Internal Management Regulations, rules to ensure the Rights and Obligations of Common and Preferred Shareholders
• Consulting on the specific rights and obligations of each type of shareholder;
• Guidance on procedures for organizing and conducting the General Meeting of Shareholders;
• Consulting on issuance of preferred shares, the Rights and Obligations of Common and Preferred Shareholders
• Issues related to corporate governance.

Long Phan’s team of experts has extensive experience in the field of corporate law, optimizing the rights and obligations of shareholders. We regularly update new regulations on corporate governance to ensure accurate and effective advice for customers.

The Law on Enterprises 2020 clearly stipulates the Rights and Obligations of Common and Preferred Shareholders. Differences in voting rights, dividends and share transfers create unique characteristics for each type of shareholder. Understanding these regulations helps protect the rights and fulfill the responsibilities of shareholders in joint stock companies. For detailed advice on the rights and obligations of shareholders, please contact Long Phan via Hotline 0906735386 for in-depth support.