Definition
Preference shares are shares in a corporation or joint-stock company that carry preferential rights over ordinary shares, typically in one or both of two respects: (1) a prior claim to dividends at a fixed or specified rate before any dividend is paid to ordinary shareholders, and (2) priority in the distribution of assets upon winding up or dissolution of the company. Holders of preference shares generally trade enhanced security and income priority for limited or no voting rights, though the precise bundle of rights attached to any class of preference shares depends on the company's articles of association or equivalent constitutional documents.
The defining feature is preference — not guaranteed return. If the company lacks distributable profits, even preference shareholders may receive nothing. The shares rank above ordinary equity but below secured and unsecured creditors in the capital structure.
Common Language
Modern common usage (Wiktionary): Plural of preference share; a share that entitles the holder to a fixed dividend before dividends are paid to ordinary shareholders.
Historical common usage (Webster's 1913): Webster's 1913 does not record "preference share" as a distinct entry, reflecting the term's specialized commercial and corporate law usage rather than general circulation.
The everyday word "preference" implies a simple choice or favoritism. In corporate law, the preference is structural and contractual — it describes a legally defined priority in the capital stack, not merely a subjective ranking. A lay reader might underestimate that "preferred" still means subordinate to all creditors, and that preference without cumulation or participation rights may offer less protection than it appears.
Common Confusion
Preference shares and ordinary shares (common stock) are frequently contrasted but less frequently confused. The more common research error is conflating preference shares with debentures or bonds. Preference shareholders are equity holders — they are members of the company, not creditors — and they bear residual risk accordingly. Another point of confusion involves the American-English divergence: "preferred stock" is the dominant American term for the same instrument; "preference shares" is standard in British, Commonwealth, and international usage. Researchers working across jurisdictions must treat both terms as functionally synonymous while remaining alert to doctrinal nuances introduced by different corporate statutes.
Recognized Forms
/SUBTYPES
Cumulative preference shares: Unpaid dividends accumulate as arrears and must be paid before any dividend reaches ordinary shareholders. Non-cumulative preference shares: Unpaid dividends in a given period are lost; they do not carry forward. Participating preference shares: In addition to the fixed preferential dividend, holders share in surplus profits or surplus assets alongside ordinary shareholders. Non-participating preference shares: Rights are limited to the fixed preference; no further participation in profits or assets. Redeemable preference shares: The company retains the right (or is obliged) to buy back the shares at a specified time or on specified conditions. Convertible preference shares: The holder may convert the shares into ordinary shares at a defined ratio and time.
Why It Matters in Research
Researchers face two persistent traps with this term. First, the historical sources treat preference shares as a specifically English law concept — Black's 1st and 2nd editions both open with "a term used in English law." This framing reflects the late nineteenth-century context in which American corporate law had not yet fully systematized the concept under its own vocabulary. By the mid-twentieth century, American jurisdictions had developed "preferred stock" as a parallel and largely equivalent instrument under state corporate statutes. A researcher working in pre-1920 American sources may encounter the English term applied to American entities, or may find the concept described without a consistent label. Post-1950 American sources will almost universally use "preferred stock."
Second, the rights attached to preference shares are almost entirely creatures of private contract — the company's articles, memorandum, or charter — rather than default statutory rules. This means the term signals a category but does not, by itself, tell a researcher what rights the holder actually has. Every research question about a specific class of preference shares requires consulting the instrument creating them.
For corporate law researchers, the distinction between cumulative and non-cumulative preferences became heavily litigated during periods of depression-era dividend arrears. The question of whether arrears survive a corporate reorganization generated substantial case law in both English and American courts through the 1930s and 1940s.
Researchers working in insolvency or liquidation contexts should note that priority of preference shares on a winding-up is separately governed from dividend priority, and a company's articles may confer one without the other.
Historical Dictionary Support
Black's 1st and 2nd editions are in close agreement, essentially reproducing the same entry, and Bouvier's adds the winding-up dimension concisely. All three sources treat the instrument as primarily a British commercial law concept, which is historically accurate for the period in which those editions were compiled.
What the historical dictionaries miss: They do not address the subtype distinctions — cumulative, participating, redeemable, convertible — that became doctrinally significant through litigation in the twentieth century. They also do not address the tax treatment of preference dividends, which diverged markedly across jurisdictions and became an important planning variable. The Bouvier entry's cross-reference to STOCK is useful as a pointer but provides no further analytical framework for preference-specific issues.
Jurisdictional Note
"Preference shares" is standard terminology in the United Kingdom, Australia, Canada, and most Commonwealth jurisdictions, governed by the relevant companies legislation in each. In the United States, the functional equivalent is "preferred stock," governed primarily by state corporate statutes, most influentially the Delaware General Corporation Law. The underlying economic instrument is substantially the same, but statutory defaults, redemption rules, and fiduciary duty questions in contested preferred-stock situations have developed along distinct doctrinal lines in American versus English law.