Preferred shares are a type of equity security that grants specific rights and benefits to shareholders over those of the shareholders that hold common shares. Issuing preferred shares in a Sociedad Anónima Promotora de Inversión (“SAPI”), can bring several advantages and implications to both the company and the shareholders. This article will explore the potential benefits, added flexibility, and implications of issuing preferred shares in a SAPI.
One of the significant advantages of issuing preferred shares in a SAPI is the ability to attract and retain investors, as well to allow the controlling shareholders to keep control of the company. Preferred shares offer a fixed dividend payment that is typically higher than the dividend paid to common shareholders, and preference in the payment of the dividends over the common stocks. This fixed income stream appeals to income-focused investors, such as retirees or those seeking stable returns on their investments. By offering preferred shares, a SAPI can tap into this investor segment and broaden its investor base.
Moreover, issuing preferred shares provides additional flexibility to a SAPI in terms of capital management. Unlike common shares, preferred shares can be tailor-made to suit the company’s specific needs. For example, a SAPI can issue preferred shares that grants voting rights in specific matters, but that will entitle its holders to receive dividends before any payments are made to common shareholders. This feature can be valuable during times of financial distress or when the company needs to suspend dividend payments temporarily. Additionally, a SAPI can issue redeemable preferred shares, allowing the company to repurchase the shares at a predetermined price, providing more control over its capital structure.
Another advantage of issuing preferred shares is the potential to raise capital without diluting the ownership of existing shareholders. By offering preferred shares, a SAPI can obtain funding from new investors without compromising the control and decision-making power of the existing shareholders. This is particularly relevant for SAPIs that have a concentrated ownership structure or a group of controlling shareholders who wish to maintain their influence over the company.
Furthermore, issuing preferred shares in a SAPI can be an effective tool for mergers and acquisitions. In such scenarios, the acquiring company can offer preferred shares as part of the acquisition deal, providing an attractive alternative to cash consideration. This approach can be advantageous for both the acquiring company and the target company’s shareholders. The acquiring company can conserve its cash reserves and reduce the financial burden of the acquisition, while the target company’s shareholders can receive a stable income stream through the preferred shares.
However, it is essential to consider the implications of issuing preferred shares in a SAPI. One significant implication is the potential limitation on voting rights. While preferred shareholders have priority over common shareholders in terms of dividend payments, their voting rights may be limited or completely excluded. This can result in a concentration of decision-making power in the hands of common shareholders, possibly leading to conflicts of interest or dissatisfaction among preferred shareholders.
Another implication is the higher cost associated with issuing preferred shares compared to issuing common shares. Preferred shareholders expect a higher dividend payout, which can increase the company’s financial obligations over time. Additionally, the complexity of designing and structuring preferred shares can lead to increased legal and administrative costs for the company.
In conclusion, issuing preferred shares in a SAPI offers several advantages and implications. The ability to attract income-focused investors, the flexibility in capital management, and the potential to raise capital without losing control of the company, are among the benefits of issuing preferred shares. However, limitations on voting rights and higher costs should be carefully considered. Ultimately, the decision to issue preferred shares should align with the SAPI’s strategic objectives and the interests of both the company and its shareholders.
Yumiko Suzuki
Jr Partner
