Author: Noor Al Khonji, Senior Associate, Bait Al Qanoon
What Are Preference Shares?
Preference shares (أسهم ممتازة) are a class of shares under Omani law that give their holders certain rights or privileges that differ from those attached to ordinary shares (أسهم عادية). These rights may relate to voting, dividends, liquidation proceeds, or other matters. Unlike ordinary shares, which generally carry the standard rights of ownership in a company, the rights attached to preference shares may be tailored to meet the company's needs and are set out in its Articles of Association.
Key Considerations
- Preference shares may only be issued by Public Joint Stock Companies (SAOGs) and Closed Joint Stock Companies (SAOCs), not other company types.
- The rights attached to preference shares, such as priority in dividends, liquidation proceeds, or voting, must be set out in the company's Articles of Association, since neither the Commercial Companies Law nor its Executive Regulations lists these rights exhaustively.
- Shares within the same class must carry equal rights, privileges, and limitations.
- Issuing preference shares requires the Articles of Association to permit it, plus approval by an Extraordinary General Meeting and two-thirds of the relevant class of shareholders.
- A shareholders' agreement alone does not create enforceable preference share rights; those rights must be incorporated into the Articles of Association.
Which Companies Can Issue Preference Shares?
Preference shares may only be issued by Public Joint Stock Companies (SAOGs) and Closed Joint Stock Companies (SAOCs).
The legal framework governing preference shares is found in the Commercial Companies Law (Royal Decree No. 18/2019) and its Executive Regulations (Ministerial Decision No. 146/2021). Companies must also comply with any applicable regulations issued by the Financial Services Authority.
What Rights Do Preference Shares Give?
Neither the Commercial Companies Law nor its Executive Regulations sets out an exhaustive list of rights that may attach to preference shares. Both simply require that such rights be set out in the company's Articles of Association in accordance with the applicable legal requirements. Accordingly, the scope of rights attached to preference shares depends largely on how those rights are drafted in the Articles of Association.
Article 122 of the Commercial Companies Law allows a company to establish different classes of shares with different rights relating to voting, dividends, liquidation proceeds, or other matters. Shares within the same class, however, must carry equal rights, privileges, and limitations.
These rights may include priority in receiving dividends, priority upon liquidation, restricted voting rights, or other agreed rights, tailored to the company's requirements.
Companies should ensure that the rights attached to preference shares are set out in the Articles of Association clearly and consistently, as ambiguity or inconsistency in drafting may give rise to disputes over the scope of those rights or how they are exercised. Investors are well advised to seek specialist legal input at the drafting stage rather than after a dispute has arisen.
If a company wishes to amend the rights attached to a class of shares, Article 122 requires approval by an Extraordinary General Meeting, together with the approval of two-thirds of the holders of that class of shares.
How Are Preference Shares Issued?
Under Article 37 of the Executive Regulations (Ministerial Decision No. 146/2021), a company may issue preference shares only if its Articles of Association permit their issue. The issuance of preference shares must also be approved by the Extraordinary General Meeting and by two-thirds of the shareholders holding that class of preference shares.
Where preference shares are issued as part of a capital increase, the company must also comply with the procedures governing capital increases under Omani law. Where the shares are allotted to specific persons, the proposed allottees must undertake to pay the value of the shares allotted to them before the allotment is approved, and the company must comply with any applicable disclosure requirements relating to the proposed allotment.
Common Misunderstandings About Preference Shares
One common misunderstanding is that a shareholders' agreement alone creates enforceable preference share rights. While a shareholders' agreement governs the contractual relationship between the parties, it does not by itself create rights that attach to the shares. The rights attached to preference shares should be incorporated into the company's Articles of Association and approved in accordance with the applicable legal requirements.
Companies should also ensure that the Articles of Association are properly drafted before issuing preference shares. Failure to properly draft the Articles of Association, or obtain the required shareholder approvals, may affect the validity of the rights attached to the preference shares.
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