Cumulative preferred shares: what are they and how do they work?

Cumulative preferred shares (cumprefs) are dividend priority shares, where the dividend accumulates if it is not paid out. A holder receives their agreed dividend percentage first, before ordinary shareholders receive anything. If it is not paid out in year one, it sits in addition to the normal dividend in year two. Primarily used by investors who want certainty regarding return without necessarily having influence.

Cumulative preference shares came into play for Bram and Joris when their first angel investor came on board. He did not want a 30% vote in their private limited company; he wanted dividends and, eventually, an exit. Cumulative preference shares — 8% per year — were the solution. The investor gained cash flow security, while Bram and Joris retained control. Everyone was happy, provided it was properly stipulated in the articles of association.

The short answer

A cumulative preferred share combines two characteristics:

• Preferred — priority to dividends over ordinary shares. Cumulative preference holders first, then the rest.
• Cumulative — undistributed dividends remain as an obligation of the BV. In a good year, the arrears are settled first before ordinary shareholders receive a share.

Example: cumulative preference of 6% at a nominal value of €10,000. In a loss year: no distribution, but the €600 remains as deferred dividend. In the following year (sufficient profit): first €600 deferred + €600 outstanding = €1,200 to cumulative preference holders, and only then to ordinary shareholders.

When do you use cumprefs?

Cumprefs are popular with:

• Investors seeking a return without control. The preferred dividend provides cash flow; less involvement in operational management.
• Family holdings. A parent who contributes funds for the next generation receives cumulative preference shares; the children run the operational BV with ordinary shares.
• Employee participation where the employee receives a guaranteed return on their investment.
• Moments of crisis. During a restart or a difficult phase, creditors can be converted into cumulative preference holders — more security for them, lower fixed costs for the BV.

Pros and cons

For the cumpref holder:

• Priority on dividends, with accrual if the BV does not distribute dividends for a year.
• Generally less risk than ordinary shares, because it is first in line.
• In some structures, also priority in the liquidation of the BV.

For the ordinary shareholder:

• No dividend until the cumulative preference holders have been paid, including arrears.
• Risk of accumulated dividend debt that must be repaid later.
• Yes: retention of control if cumulative preference shares are issued without voting rights.

Statutory regulations: what must be included?

The rights of cumprefs are set out in the articles of association:

• The dividend percentage (often 5% – 10% per year on nominal value or share premium).
• The basis for the calculation (nominal value or including premium).
• The accumulation period (unlimited or, for example, a maximum of five years).
• Potential voting rights (cumprefs without voting rights are common; sometimes they do include voting rights on specific decisions).
• Priority in liquidation (first nominal value + outstanding dividends, then reserves).
• Any purchase or conversion rights (conversion into ordinary shares, buyback).

Tax considerations

For holders of cumprefs, the following is important:

• Substantial interest (Box 2). An interest of > 5% (across all types combined) constitutes a substantial interest. Cumulative preference shares are included.
• Taxation of dividends. Preferred dividends are taxed just like regular dividends at the recipient's end.
• Unpaid dividend. Cumulatively accrued dividend is taxed in the year of distribution, not the year of accrual.

Discuss the tax implications with an accountant in advance — especially for family heads or investment structures.

Honest recommendation

Cumulative preference shares are a powerful tool for investors and specific structures. They are not necessary for an average one-person BV. For investors or family holding companies, however, they are virtually indispensable for a fair balance between return and control. Structure the statutory rights precisely — vague formulations lead to disputes in year three.

For a broader explanation of shares: how shares work in a BV. For the accompanying practical agreements: shareholders' agreement.

Frequently Asked Questions