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Telstra: Redeemable Preference Shares
Brendan Bailey
Law and Public Administration Group
The Coalition's Telstra (Dilution of Public Ownership) Bill 1996
(Telstra Sale Bill) proposes the sale of one third of the Com-monwealth's
shares in Telstra Corporation. At present, the Commonwealth, under the
Telstra Corporation Act 1991, is the only permitted shareholder
in Telstra(1). The Telstra Sale Bill is standard asset sale legislation
combined with provisions which deal with the Customer Service Guarantee
(Universal Service Obligation).
Senator Brian Harradine has raised the issue of whether the conventional
asset sale approach (offering ordinary voting shares to the public) is
the only option and he has suggested that re-deemable preference
shares be considered to raise the expected $8 billion sought by
the Com-monwealth to retire public debt and to fund environmental protection(2).
The Treasurer, Hon Peter Costello, has indicated that this proposal is
not an attractive option for the Government (the Government has not, as
yet, formally responded to Senator Harradine)(3).
Ordinary Voting Shares
An issued ordinary voting share usually represents one of the equal
parts into which a company's capital is divided(4). The capital of a company
is the fund or principal which it uses to carry on its business(5). A
voting share enables the shareholder to vote at annual general meetings
of the company, and at special general meetings. A shareholder is re-ferred
to as a member of the company and is a part-owner.
Shareholders receive dividends (a share of the company's profits), and,
under taxation law, the tax on the earnings can be paid by the company
(franking). A franked dividend, or dividend imputation, is attractive
to an investor because the shareholder receives a taxation credit for
the income tax already paid by the company on corporate profits
Telstra's Share Capital
Telstra has an authorised share capital of 20 billion ordinary
shares of $1 each. Of that share capital, some 6.9 billion shares have
been issued to the Commonwealth (2 billion of those shares are
paid to $0.75 cents each). This means that Telstra has an issued and paid
up share capi-tal (in dollar terms) of $6.4 billion(6). These are the
only types of shares issued by Telstra. Only the Commonwealth can hold
those shares, at present. Allowing some private ownership of shares in
Telstra is viewed by some as beneficial, in that it is argued that it
exposes Telstra to the discipline and transparencies of the commercial
market.
Redeemable Preference Shares
Ordinary voting shares are the conventional form of shares is-sued by
a company but they are not the only type of company shares. Provided the
Memorandum and Articles (constitution and rules of the company) permit,
a company can issue a variety of classes of shares, some of which may
not have full voting rights, and which may be redeemed by the company.
A redeemable preference share is one way that a company
can raise capital without necessarily allowing full voting rights. In
exchange for a specified dividend of, say, 8% of the value of the share,
a shareholder will forego an ordinary voting entitlement, provided the
preference share is given first priority in payment of the dividend (ie.
ahead of ordinary shares). In addition, preference shares usually carry
the condition or presumption that the dividend is cumulative, which means
that if the dividend is not paid in any one year, the prefer-ence share
dividend is still pay-able in a subsequent year, or in winding-up of the
company. Unless they are a participating preference share, redeemable
preference shares do not attract bonus issues or additional dividend.
They offer the investor a fixed rate of return. The taxation law was changed
in 1987 to treat preference share dividends as a form of interest(7).
Dividend franking is now not available on these shares.
Redeemable preference shares originated in the UK Companies Act 1929
and appeared in the various Australian State company laws in the 1930s.
During the 1980s they were, unfortunately, associated with tax rorts.
They remain, however, a useful and flexible method of capital raising
when used appropriately.
Invariably, a company will re-strict the voting rights of its is-sued
preference shares. In law, however, even a preference share is presumed
to have full voting rights, unless expressly restricted. Consequently,
there can be occa-sions when a preference share attracts limited voting
rights, and these include the right to vote:
- when the preference dividend is in arrears
- on a proposal to reduce the capital of the company
- on a proposal affecting the rights attaching to the prefer-ence share
- on a proposal to wind the company up, and during the winding up(8).
Another type of share is a convertible redeemable preference share
which can be redeemed in cash, or converted into ordinary voting shares
on one or more specified dates.
Advantages and Disadvantages of Redeemable Shares
Advantages
- preference shares invariably offer a conservative but more assured
return to investors compared to the dividend from ordinary voting shares
- they are usually less volatile, in terms of market price fluctuations,
compared to ordinary voting shares
- the restriction on voting rights attaching to preference shares means
that the ordinary shareholders with full voting rights retain effective
control of the company, including the appointment of the directors
- redeemable preference shares may be seen as just a financing instrument;
once redeemed, the remaining ordinary shareholders may receive a higher
dividend as well as an appreciation in the value of their shares
- unless they are convertible, preference shares do not result in part
ownership of the company.
Disadvantages
- redeemable preference shares are not as commercially attractive to
investors; they are loosely referred to as debt securities
- dividend imputation (franking credits) are no longer available on
these shares, unless the Commonwealth Parliament amends the taxation
laws
- a debt obligation is created (though this is not always a problem
in a commercial sense)
- this type of capital raising is sometimes expensive and inefficient
- some of the corporate excesses of the 1980s means there is some scepticism
about promoting these shares.
Endnotes
- Section 8, Telstra Corporation Act 1991.
- Australia, Senate, Hansard, 9 September 1996: 3054 (Proof).
- Australia, , House of Representatives, Hansard, 18 September 1996:
4293 (Proof).
- See Renton E. (Ed.), Dictionary of Stock Exchange Terms, Australian
Investment Library, Melbourne, 1990.
- See Osborn's Concise Law Dictionary, 17th Edition, Sweet and Maxwell,
London, 1983.
- Annual Report 1995, Telstra at page 63.
- Taxation Laws Amendment (Company Distributions) Act 1987.
- See Ford, H. Principles of Company Law, 5th Edition, Butterworths,
Sydney, 1990: 226.
Other Reading: Senator Harradine, 'Hybrid securities are an option
in Telstra financing', Australian Financial Review, 11 September 1996;
Bartholomeusz, S. 'Preference shares not right answer for Telstra', The
Age, 12 September 1996.
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