In a joint stock company, not all shares are equal. Besides ordinary shares, the law allows companies to issue preference shares — each class carrying a special package of rights serving different purposes: attracting investors seeking stable dividends, securing control for founding shareholders, or creating a capital "exit" for financial investors.
Understanding preference share classes helps companies design flexible capital structures — and helps investors know what rights they truly hold.
Contents
- 1. What are preference shares
- 2. Four classes of preference shares
- 3. Dividend preference shares
- 4. Redeemable preference shares
- 5. Voting preference shares
- 6. Transferring preference shares
- 7. Issuance procedures and amending preferential rights
- 8. Frequently asked questions
- 9. When to work with a lawyer
- References
1. What are preference shares
Preference shares carry rights preferential to ordinary shares in one or more respects: dividends, capital redemption, voting, or other rights provided in the company charter. In exchange, preference shareholders are typically denied certain rights that ordinary shareholders have (most commonly voting rights).
Preference shares balance interests: the company raises capital without diluting existing shareholders' control; investors receive financial preferences or protections that ordinary shares lack.
2. Four classes of preference shares
Under the Law on Enterprises, a joint stock company may have:
- Dividend preference shares — preferential dividends;
- Redeemable preference shares — contributed capital redeemable at the holder's request or under conditions stated on the certificate;
- Voting preference shares — more votes per share than ordinary shares;
- Other preference share classes — provided in the company charter (e.g. combined dividend + redeemable preferences).
The company charter decides the specific "rights package" of each class: the preferential dividend rate, redemption conditions, number of votes. Two different companies may therefore have "dividend preference shares" with entirely different rights content.
3. Dividend preference shares
The most common class in capital raising. Characteristics:
- Higher dividends: dividend preference shares pay more than ordinary shares — a fixed rate (e.g. 12% per year on par value) or a charter-defined formula;
- Payment priority: priority in receiving dividends before ordinary shareholders, and priority in receiving contributed capital back upon dissolution or bankruptcy (after creditors);
- No voting rights: dividend preference shareholders may not attend or vote at the General Meeting of Shareholders, nor nominate members to the Board of Directors or Supervisory Board.
This class suits financial investors wanting stable cash flow without interest in managing the company — similar to a "perpetual bond" that remains equity.
4. Redeemable preference shares
Holders of redeemable preference shares are entitled to have the company redeem their contributed capital at the holder's request or under conditions stated on the share certificate (e.g. after 5 years, when the company reaches certain profits, or upon a specific event).
This creates an "exit" for investors: instead of finding a buyer for the shares, the investor may require the company itself to buy them back. In investment practice, redeemable preference shares are often combined with dividend preferences for an attractive package: high dividends plus a withdrawal right.
Key note: redemption reduces the company's charter capital and must follow charter-capital reduction procedures under the Law on Enterprises — the company may only redeem while remaining able to pay all debts after redemption.
5. Voting preference shares
Unlike the two classes above, voting preference shares are a control instrument, not a financial one:
- Each voting preference share carries more votes than an ordinary share (the exact number set by the charter);
- Only organizations authorized by the Government and founding shareholders may hold them;
- Founding shareholders may hold them only within the statutory period from the date the company is issued its Enterprise Registration Certificate; afterwards, voting preference shares convert into ordinary shares;
- Holders of voting preference shares face transfer restrictions within the statutory period (except transfers to other founding shareholders).
This class lets founding shareholders keep control in the early stage despite not holding a capital majority — but it is a time-limited privilege, not a permanent one.
6. Transferring preference shares
Unlike freely transferable ordinary shares, preference shares carry restrictions:
- Founding shareholders' voting preference shares: restricted from transfer within the statutory period; only transferable to other founding shareholders during this time;
- Other preference classes: transferable under the company charter, which may impose conditions: existing shareholders' pre-emptive rights, General Meeting of Shareholders or Board approval, or lock-ups on transfers to outsiders;
- Transferees inherit all preferential rights attached to the shares — so buyers must read the charter carefully to know what "rights package" they are buying, and not mistake the shares for ordinary ones.
In M&A transactions, reviewing the charter for outstanding preference share classes is a mandatory due diligence step: a "forgotten" block of voting preference shares can overturn post-deal control calculations.
7. Issuance procedures and amending preferential rights
Issuing a new preference share class or changing rights attached to outstanding preference shares is a material decision requiring:
- General Meeting of Shareholders approval at the statutory voting ratio (higher than usual, as shareholder rights are affected);
- Protection of existing preference shareholders: changing rights of an outstanding preference class may require approval from the holders of that class themselves;
- Charter amendments recording the new share class and its rights package;
- Offering and registration procedures: conduct the offering as regulated, register charter-capital changes if capital increases; public offerings are additionally governed by the Law on Securities.
Resolutions on preference shares directly touch the company's balance of power — sloppy drafting is the origin of shareholder disputes lasting years.
8. Frequently asked questions
What types of preference shares exist?
Under the Law on Enterprises, a joint stock company may have: dividend preference shares, redeemable preference shares, voting preference shares, and other preference share types provided in the company charter. Each type carries a different package of preferential rights compared with ordinary shares.
What rights do dividend preference shareholders have over ordinary shareholders?
Dividend preference shareholders receive dividends at a higher rate than ordinary shares (the specific rate set by the charter or the General Meeting of Shareholders), enjoy priority in dividend payment and in receiving contributed capital back upon dissolution. In exchange, they have no voting rights, may not attend the General Meeting of Shareholders, and may not nominate members to the Board of Directors or the Supervisory Board.
Who may hold voting preference shares?
Voting preference shares may only be held by organizations authorized by the Government and by founding shareholders. Founding shareholders may hold voting preference shares only within the statutory period from the date the company is issued its Enterprise Registration Certificate; after that period, their voting preference shares convert into ordinary shares.
What are redeemable preference shares?
Redeemable preference shares entitle the holder to have the company redeem the contributed capital at the holder's request or under conditions stated on the share certificate. This instrument is commonly used when investors want a pre-secured capital "exit", often combined with dividend preference rights.
What restrictions apply to transferring preference shares?
Voting preference shares of founding shareholders are restricted from transfer within the statutory period (except transfers to other founding shareholders). Other preference share types transfer under the company charter, which may impose conditions such as existing shareholders' pre-emptive rights or General Meeting of Shareholders approval.
What procedures are needed to issue preference shares?
Issuing a new class of preference shares or changing the rights attached to outstanding preference shares must be approved by the General Meeting of Shareholders at the statutory voting ratio, with corresponding charter amendments and offering procedures plus charter-capital change registration (if capital increases). Resolutions on preference shares directly affect the power structure and must be drafted tightly to avoid future disputes.
9. When to work with a lawyer
Work with a lawyer when your company: plans to issue preference shares to raise capital; wants to design control mechanisms for founding shareholders; is an investor considering buying preference shares (you need to read the charter to know the real "rights package"); or faces disputes over preference shareholders' rights. Designing correctly from the start costs far less than disputing later.
A lawyer also adds value in cross-border deals: foreign investors often arrive with expectations shaped by preferred-stock regimes in Delaware, Singapore, or the Cayman Islands — where preferred shares can carry liquidation preferences, anti-dilution rights, and drag-along provisions. Vietnamese law does not automatically replicate those features; equivalent protections must be built through the charter, shareholders' agreements, and carefully drafted share terms. Getting this translation right at the structuring stage prevents expensive renegotiation after the investment is made.
FLAT Law Firm advises comprehensively on capital structure and preference shares: designing share classes, drafting charters, issuance procedures, transfer transactions, and shareholder dispute resolution. Contact our hotline at 0988424851 for advice on your specific case.
References
- Law on Enterprises No. 59/2020/QH14 and amending Law No. 76/2025/QH15 (effective 01/7/2025).
- Law on Securities No. 54/2019/QH14 (for public share offerings).
