In today’s evolving corporate finance landscape, companies often turn to preference shares as a strategic way to raise capital. Unlike ordinary shares, they allow companies to secure funding without giving up control, while offering investors a more structured, stable return. As highlighted by The Edge Malaysia in its article on Redeemable Convertible Preference Shares, the finer details of these instruments are crucial in shaping both company strategies and investor protection.

For investors, preference shares may not promise high growth, but their predictable dividends and priority in payouts make them attractive, especially when paired with features like redemption, which provides a clear exit timeline.

This redemption option is a key feature valued by both companies and investors. It reflects a company’s commitment and planning, while giving investors’ confidence in recovering their capital within an agreed timeframe.

1. Why Companies Choose Preference Shares Over Ordinary Shares

In Malaysia, the governance of preference shares is a two-tiered system, with the Companies Act 2016 providing the legal framework and the company’s Constitution detailing the specific rights and terms.

• Companies Act 2016: This legislation provides the legal framework, with Section 69 allowing for different share classes, Section 72 governing their issuance and redemption, and Section 90 mandating that a company’s Constitution must detail the specific rights of each share class

• Company Constitution: This is the detailed and vital document that defines the specific terms and rights of preference shares, such as voting rights, dividend rights, liquidation rights, and redemption terms, which are not explicitly defined in the Companies Act.

Difference between Ordinary Share and Preference Share:

NO.	FEATURE	ORDINARY SHARE	PREFERENCE SHARES
(i)	Voting rights	Yes	No (unless specified in constitution)
(ii)	Dividend	Variable, not guaranteed	Fixed, priority payment
(iii)	Dividend priority	Paid after preference shares	Paid before ordinary shares
(iv)	Risk level	Higher (returns depend on performance based)	Lower (fixed returns)
(v)	Control impact	Can dilute the owners’ control over the company	No dilution of owners’ control over the company
(vi)	Common holders	Founders, senior management, general shareholders	Institutional investors, venture capital firms, angel investors

Subject to the Companies Act 2016 and the Company’s Constitution, a company may issue preference shares which are liable or at the option of the company liable to be redeemed, in accordance with its Constitution.

They are popular in private equity and startup funding for offering:

• Priority payouts: Fixed dividends and repayment before ordinary shares.
• Capital without control loss: Usually no voting rights, preserving founders’ decision-making power.
• Flexible features: Options for redemption or conversion, blending benefits of equity and debt.

For companies, preference shares offer a funding avenue with fewer restrictions than loans. For investors, they provide predictable, secure returns.

These shares can further take on forms that grant specific financial or exit protections, such as the following: 

NO.	TYPE OF PREFERENCE SHARE	FEATURE	INVESTOR PROTECTION
(i)	Redeemable Preference Shares	Can be bought back by the company after a set period	Offers planned exit, reduces long-term risk
(ii)	Convertible Preference Shares	Can be converted into ordinary shares	Enables participation in future company growth
(iii)	Redeemable Convertible Preference Shares	Can be redeemed or converted	Combines liquidity with equity upside potential
(iv)	Irredeemable Convertible Preference Shares	Cannot be redeemed, but can be converted	Long-term hold with future access to ordinary share rights

In addition to these structural protections, preference shares usually carry a fixed dividend rate, similar to earning interest which investors can benchmark against returns from other avenues, such as fixed deposits or bond placements, to assess relative attractiveness.

2. Redemption: A Core Promise to Investors

One of the key features of preference shares is the redemption option a commitment by the company to repurchase the shares at a set date or event as pre-agreed in legal documents such as the company’s Constitution, shareholders’ agreement, or share subscription agreement.

i. How it comes about:

• Performance targets: If a company fails to meet certain performance goals, an investor might have the right to redeem their shares. 
• Change in control: A change in ownership or management of a company can trigger redemption rights. 
• Expiration of a term: Some agreements allow for redemption after a specific period. 
• Violation of terms: If one party breaches the agreement, the other party might be able to redeem their assets. 

ii. Agreed Terms: The agreement specifies when and how redemption occurs, including the price or premium either fixed in advance or based on a valuation method.

iii. Purpose of Redemption: Provides investors with a planned exit and reduces long-term risk, while giving companies flexibility to manage capital structure.

3. Timing of Redemption: A Mark of Credibility

Redeeming preference shares on time demonstrates a company’s financial discipline, healthy cash flow, and commitment to investors, strengthening its credibility.

Under Section 72(4) of the Companies Act 2016 preference shares may only be redeemed if the shares are fully paid up and the redemption is made out of either:

i. profits;
ii. a fresh issue of shares; or
iii. the capital of the company

However, if an extension is unavoidable due to valid reasons, like market conditions or strategic needs, companies must ensure:

i. Transparent communication with investors;
ii. Legitimate, well-explained justification for the delay;
iii. Fair compensation, such as higher dividends or a premium;
iv. Formal amendments to the share agreement, with board and regulatory approval.

Handled professionally, even delayed redemptions can preserve investor trust.

4. The Redemption Process and Procedure

The redemption of preference shares should be a clear and well-managed process to ensure investor confidence and legal compliance.

The right to redeem preference shares is granted under Section 72 of the Companies Act 2016. Process of redemption of preference share as follows:

1. Redemption Methods
   • Confirm preference shares are redeemable under the Constitution or shareholders’ agreement and are fully paid-up.
   • Redemption can be funded from:
     • Profits available for distribution,
     • Proceeds of a fresh issue of shares, or
     • Capital – requires directors’ solvency declaration under Section 113.
2. Board Resolutions & Documentation
   • Hold a Board Meeting to approve:
     • Redemption terms (price, date, method),
     • Source of funds,
     • Payment to shareholders and share cancellation,
     • Authorisation for SSM filings.
   • Prepare and sign solvency declaration (if capital is used).
3. Execution of Redemption
   • Pay redemption proceeds to preference shareholders
   • Cancel redeemed shares in the company’s register.
4. Relevant Sections & Lodgement to SSM
   • Comply with:
     • Section 72 – redemption of preference shares,
     • Section 113 – solvency declaration (if applicable).
   • Lodge the forms to SSM within the required timeframe.
   • Provide written confirmation of redemption to affected shareholders.
     

5. Updating the Company’s Equity Structure

Redemption has a direct impact on the company’s capital base and equity reporting. Once shares are redeemed, the company must update its records, both internally and with the SSM, to reflect:

• A reduction in paid-up capital; and
• Changes to the register of shareholding

Upon completion of the redemption, the shareholder will receive an official confirmation of redemption (e.g., a redemption statement or acknowledgment letter), and the updated Section 51, Register of Members will serve as evidence of the revised shareholding structure.

Timely and accurate updates are crucial for transparency, especially for future audits, due diligence, or fundraising activities.

POSH Corporate – Your Trusted Partner in Business

As a specialist in corporate governance and compliance, we guide companies through the complex redemption process with precision and professionalism.

Our contributions include:

1. Advisory – Providing strategic guidance on the legal, procedural, and commercial aspects of preference share redemption, including optimal structuring, timing, and process coordination.
2. Compliance – Ensuring adherence to the Companies Act 2016 and related regulations, managing documentation, updating statutory records, and overseeing necessary filings.

We have successfully navigated complex corporate exercises including private preference share issuances and redemptions, as well as high-profile Equity Crowdfunding (ECF) projects involving both ordinary and preference shares.