Preferred shares should earn interest, not dividend

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EMETERIO SD. PEREZ

TO public investors, it may be enough that they receive dividends – either in cash or in stock – due the shares they own in listed companies. They are usually limited to owning common shares. Preferred shares, more often than not, are reserved for the majority owners of the company and their allies.

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It is even more seldom that the majority stockholders would allow the public to hold voting preferred shares. Ironically, it is only in the Philippines that the Securities and Exchange Commission (SEC) allows the issuance of voting preferred shares. There is no such thing, a reader of The Manila Times commented.

Preferred shares should be defined more clearly by both the SEC and the Philippine Stock Exchange (PSE) for the sake of the public. Are these liabilities? If so, holders or preferred shares should not be entitled to dividends but must share in interest payments.

It is not fair for the SEC and the PSE to allow the issuance of preferred shares to majority stockholders, who are usually the business owners, to the point of tolerating the monopoly of voting preferred shares. As has been mentioned in a previous Due Diligencer piece, the preemptive right of stockholders should be expanded to cover the issuance of voting and non-voting preferred shares.

At the same time, public ownership reports (POR) need a major overhaul to include preferred shares in computing the number of shares left for the public to hold.

Capital stock
If preferred shares are considered liabilities, why are they part of a company’s capital stock, which, in turn, is an entry under stockholders’ equity?

No one would probably raise this issue in annual stockholders’ meetings. It would even be difficult for the public to seek a major change to entries in financial filings. For instance, will the SEC and the PSE revamp the entries under stockholders’ equity in audited financial reports?

Independent directors would certainly fear questioning the flotation of preferred shares and the issuance exclusively for the owners of voting preferred shares. Definitely, they would not risk losing their directorships, particularly in listed companies that pay them well.

Remember, as members of the board, they are entitled to the same compensation as regular directors even if they are appointed by the majority and not elected by stockholders.

It is up to the public to ask the SEC as a regulatory authority why preferred shares should earn dividends that come from retained earnings, when, as liabilities, their holders become creditors.

In turn, as creditors, the owners of preferred shares should be paid interests due their “loans.”

Due Diligencer’s take
For as long as preferred shares are considered part of capital stock, they will remain among the entries under the stockholders’ equity of a stock corporation. And if such shares are regarded as liabilities and at the same time capital, their holders are entitled to dividends like common shareholders.

The holdings by public investors are not only diluted by the issuances of preferred shares to the owners; the dilution could also violate the 10-percent minimum public ownership (MPO) rule imposed by the SEC to protect the holdings of the public.

Will the SEC see to it that the issuances of preferred shares do not result in the dilution of public ownership below the required 10 percent?

Again, public investors should study how they could prevent the incursion of preferred shareholders into the retained earnings of listed companies in which they own shares.

Retained earnings should be for the exclusive benefits of common shareholders and should not finance the interest payments due preferred shareholders.

Preferred shares should not earn dividends. As liabilities, their holders are entitled to interest payments, which, in turn, is a corporate expense.

Will anyone among the public be able to count the number of voting preferred shares that business owners have issued to themselves? Just asking.

esdperez@gmail.com

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