What legal steps are required to introduce preference shares?

Introducing preference shares typically requires amending the articles of association and passing a resolution at the general meeting in accordance with the Swedish Companies Act. The change must be properly documented and notified to the Swedish Companies Registration Office (Bolagsverket).

Preference shares

Q: What are preference shares?

Preference shares are shares that typically give their holders priority to dividends ahead of ordinary shareholders, and sometimes priority to assets on liquidation. The exact rights are set out in the company’s articles of association and can be tailored to the capital structure.

Q: When do preference shares become relevant?

Preference shares often become relevant in capital raisings or negotiations between founders and investors, where a company wants to attract investment while differentiating economic rights. They can be used to separate dividend rights from voting control depending on how the share class is structured.

Preference shares are a distinct class of share that confer priority rights to dividends and, in some cases, to the company’s assets on liquidation.

Glossary
Preference shares

Explained – what are preference shares?

A preference share is a share that gives its holder priority to dividends ahead of holders of ordinary shares. It is commonly used in corporate structures where investors seek a more stable and predictable return. In brief: what are preference shares? They are shares with contractually prioritised economic rights that can be tailored in the company’s constitutional documents. A business lawyer can help interpret the Swedish Companies Act (Sw: aktiebolagslagen) provisions on preference shares and draft the articles of association correctly. Preference shares occur in both private and public limited companies across Europe.

When do preference shares become relevant?

The question of preference shares often arises in connection with capital raising or negotiations between founders and investors. They can attract capital without surrendering control, i.e. avoiding dilution. Preference shares may also be used where a company wants to reward long-term investors or differentiate between share classes ahead of a future sale or listing. Put simply, what are preference shares doing here? They enable a company to separate economic rights from voting control.

Illustration of a tree growing from two share certificates, symbolising preference shares, dividend rights and liquidation priority in company law.

Key considerations for preference shares

When a company considers issuing preference shares, several practical and legal factors should be analysed. Below are central points to address before any decision is made.

The rights and terms of the preference shares, including how the class differs from other shares, must be stated clearly (definition of preference shares).
The rules on equal treatment of shareholders in the Swedish Companies Act must be observed carefully when introducing different share classes.
If preference shares are issued in a new share issue, the valuation of preference shares and the subscription price should be determined objectively and transparently.
The general meeting must approve any amendments to the articles of association affecting the terms of the preference shares.
Dividend terms should align with the company’s long-term financial strategy and dividend policy.
In investor agreements, specific provisions on the conversion of preference shares, redemption of preference shares or dividend priority may be required to avoid future disputes.
Ensure that information to shareholders is provided transparently and in line with applicable corporate law requirements.

Through a well-structured set of articles and a robust shareholder’s agreement, a company can build investor confidence whilst protecting existing owners’ interests.

Preference shares

Why are preference shares important?

Preference shares matter because they offer a different balance of risk and return than ordinary shares. Investors gain a priority right to dividends, which can be perceived as more secure than ordinary shares. At the same time, preference shares frequently entail a cap on the dividend to which they are entitled. For the company, they make it possible to attract capital without ceding the same voting rights or ownership that would otherwise be required.

They are often used in growth companies, real estate companies and investment structures where predictable returns are important. By tailoring the terms, a company can offer different risk profiles to different investors, creating flexibility in the capital structure (preference shares vs ordinary shares).

For long-term relationships between investors and companies, preference shares help clarify economic expectations and bring transparency to dividend policy and repayment terms. Used correctly, preference shares can enable efficient capital raising.

Preference shares confer priority to dividends and sometimes to company assets on liquidation, whereas ordinary shares typically carry greater voting rights (difference between preference shares and ordinary shares).

They are used when the company wishes to offer investors specific economic rights without granting all the rights attached to ordinary shares. This is common in start-ups and investment companies.

The dividend can be set out in the articles of association. To avoid uncertainty, the following points are commonly regulated:

Fixed dividend level per share.
Terms for missed dividends and any cumulative rights.
Payment dates.

Investors choose them for stable returns and priority on dividends. They are sometimes viewed as a hybrid between bonds and ordinary shares.

Introducing preference shares requires an amendment to the articles of association and a resolution of the general meeting. The process must be documented and notified to the Swedish Companies Registration Office (Bolagsverket) under the Swedish Companies Act.

Preference shares can strengthen the capital base without diluting existing owners’ voting rights. They can also be used to establish different series of shares: