Preferred Shares: Granting Preferential Treatment in a Swiss Company

Can Preferential Treatment Be Granted?

Introduction: why does this question arise today?

In many Swiss companies—particularly family-owned and entrepreneurial businesses—the issue of internal fairness extends far beyond the simple allocation of share capital. It is common for one child or a key employee to be significantly more involved than others, to assume greater managerial responsibilities, or to make a decisive contribution to the company’s development and long-term value creation. Such differentiated involvement naturally leads company founders or controlling shareholders to consider forms of recognition that go beyond strict capital equality.

This is precisely the context in which preferred shares emerge as a fully-fledged legal and financial instrument. A preferred share is an equity instrument to which specific rights—most often economic in nature—are attached, distinguishing it from ordinary shares. These rights may relate to dividend entitlements, liquidation proceeds, or exit mechanics, and must be expressly set out in the company’s articles of association in accordance with Swiss corporate law.

In practice, preferred shares are frequently presented as a “tailor-made” solution. Yet their legal, economic and tax implications are often only partially understood. As is commonly heard among entrepreneurs and business owners:
“The instrument exists, but few truly understand what it is worth—and what it implies.”
This lack of clarity explains why preferred shares are often viewed with hesitation, and why discussions around them tend to raise as many concerns as they do expectations.

At the heart of the matter lies a simple but fundamental question:
can preferential treatment be granted to a specific individual without undermining the legal, tax and economic balance of a company?

Put differently, how can a particular contribution be recognised without creating lasting imbalances between shareholders, weakening corporate governance, or exposing the company—or the beneficiary—to future legal or tax risks?

This article seeks to provide a clear and structured answer to that question. It examines the Swiss legal framework governing preferred shares, the human and economic challenges specific to family-owned and managerial contexts, the nature and scope of the rights attached to such instruments, and the limits imposed by law. It also addresses their tax implications, their impact on equity value, and the methodologies required to value them rigorously—particularly when they incorporate option-like features.

The objective is not to promote preferred shares as a universal solution, but to demonstrate that they can be a powerful governance tool—provided they are properly structured, fully understood, and carefully valued. Only under these conditions can they serve their intended purpose: granting preferential treatment without creating imbalance.

The legal principle: can preferential treatment be granted in a Swiss company?

At first glance, Swiss corporate law may appear incompatible with the idea of favouring one shareholder over another. The Swiss public limited company (société anonyme / Aktiengesellschaft) is founded on a core principle: the equal treatment of shareholders. This principle is designed to ensure that shareholders are treated fairly, irrespective of their identity or position within the company.

However, equal treatment does not imply absolute or rigid equality. Swiss law expressly allows differentiated treatment, provided it rests on a clear legal basis and is implemented in a transparent and formalised manner.

The legal framework governing Swiss public limited companies is set out in Articles 620 et seq. of the Swiss Code of Obligations. Within this framework, Article 654 CO explicitly allows companies to create different classes of shares, including preferred shares, provided that such classes are предусмотрено in the articles of association and approved by the shareholders’ meeting. The legislator thus recognises that shareholders do not necessarily have to enjoy identical economic or political rights.

In practical terms, Swiss law permits differentiation—but only if it is statutory, explicit and economically justified. Granting preferential treatment is therefore not prohibited per se. What is prohibited, by contrast, is informal, discretionary or concealed favouritism.

This approach is reinforced by Article 656 CO, which provides that preferred shares may confer specific advantages, notably in relation to dividends or liquidation proceeds. These advantages form the legal basis for granting economic priority to a particular shareholder without calling into question the validity of the corporate structure.

At the same time, Swiss law offers robust protection to other shareholders. Article 656f CO strictly governs amendments to the articles of association that may affect shareholder rights. A preferential structure that is excessive, poorly documented or economically unjustified may be challenged—particularly if it effectively strips ordinary shares of their economic substance or constitutes an abuse of majority power.

The legal answer to the initial question is therefore nuanced but clear:
yes, it is possible to grant preferential treatment within a Swiss company—whether to a child or to a key employee—provided that such treatment takes the form of a structured legal right, embedded in the articles of association and grounded in economic coherence.

This distinction is critical. Swiss law does not sanction differentiation as such; it sanctions arbitrariness, opacity and manifest imbalance. This is precisely why preferred shares play a central role: they transform a subjective intention—recognising a particular contribution—into an objective, transparent and enforceable legal mechanism.

Recognising a child or a key employee: human and economic challenges

Behind any legal or financial structure lie human realities. The decision to grant preferential treatment to a child or to a key employee rarely stems from arbitrariness. It is usually driven by a—often legitimate—perception of differentiated contribution to the company’s development, stability or long-term success.

In a family-owned business, it is common for one child to be actively involved in day-to-day operations, to assume managerial responsibilities, or to play a central role in the company’s continuity, while other family members remain more distant from the business. The founder is then faced with a classic tension: maintaining patrimonial equality between heirs while recognising economic reality.

In a managerial context, the dynamics are different but equally sensitive. A key executive or senior manager may be instrumental to the company’s growth, structuring or transformation. Retaining such a profile and aligning their interests with long-term value creation is a clear economic objective. However, recognition that is poorly designed or insufficiently explained can generate frustration among other executives or complicate future governance.

In both situations, the issue goes far beyond the mere allocation of a financial benefit. What is at stake is the preservation of:

internal cohesion, whether family-based or managerial;
clarity and predictability of internal rules;
and the credibility of governance vis-à-vis third parties, including investors, advisors and tax authorities.

A poorly articulated differentiation can easily produce the opposite of the intended effect. What was meant to serve as a tool for motivation or recognition may become a source of latent tension—or even open conflict—particularly at critical moments such as a sale, succession, transmission or entry of an external investor.

For this reason, human considerations cannot be dissociated from economic ones. Granting preferential treatment is acceptable and sustainable only if the differentiation is objectively justified, clearly understandable, and proportionate to the beneficiary’s actual contribution to value creation.

From this perspective, preferred shares offer a particularly suitable framework. They make it possible to recognise a specific contribution without altering the formal balance of share capital or day-to-day governance. By translating subjective recognition into clearly defined economic rights, preferred shares help defuse potential tensions and stabilise internal relationships.

That said, their effectiveness rests on a critical condition: the economic value of the rights granted must be clearly understood and broadly accepted by all stakeholders. Absent such understanding, even the most sophisticated legal structure will fail to preserve long-term human and economic balance.

Preferred shares: definition and economic rationale

A preferred share is both a legal and a financial instrument designed to introduce differentiation between shareholders without altering the company’s fundamental structure. Under Swiss law, it is defined as a share to which specific rights are attached—distinct from those conferred on ordinary shares—provided that these rights are expressly set out in the articles of association.

Contrary to a common misconception, preferred shares are neither marginal nor exceptional. They are fully embedded in the logic of Swiss corporate law, which explicitly allows the creation of multiple classes of shares in order to reflect differentiated economic realities. The underlying principle is straightforward: shareholders do not all contribute in the same way to value creation, and their rights may therefore be calibrated accordingly.

From an economic standpoint, preferred shares allow for a decoupling between capital ownership and the allocation of economic returns. Whereas ordinary shares confer a proportional and symmetrical participation in profits and liquidation proceeds, preferred shares introduce priorities, protections or conditional mechanisms.

This logic is particularly relevant in situations where a founder or controlling shareholder seeks to:

recognise an above-average contribution;
secure a long-term commitment;
or organise a gradual transmission without immediate dilution of control.

It is important to emphasise that preferred shares do not create value in and of themselves. Rather, they reallocate future value between different classes of shares, based on the rights attached to each. This reallocation may take the form of enhanced protection in downside scenarios, priority access to certain cash flows, or asymmetric participation in future upside.

From a financial perspective, preferred shares sit at the intersection between pure equity and structured instruments. The more conditional, hierarchical or scenario-dependent the attached rights, the more their value depends on the company’s future trajectory—and the less they can be treated as a simple fraction of share capital.

This dual nature explains why preferred shares are both powerful and sensitive. When properly designed, they reconcile economic fairness with governance stability. When poorly understood or inadequately valued, they can introduce lasting imbalances—particularly if their true economic impact is underestimated by existing shareholders.

A clear understanding of the economic rationale behind preferred shares is therefore a necessary prerequisite before examining the specific rights that may be attached to them, as well as the legal limits imposed by Swiss law.

Preferred shares as a tool for controlled differentiation

One of the main advantages of preferred shares lies in their ability to introduce targeted and controlled differentiation between shareholders—where other mechanisms often produce broader, less predictable or irreversible effects.

Unlike a direct transfer of ordinary shares or an informal adjustment of economic arrangements, preferred shares allow differentiation to be embedded within a stable, transparent and enforceable legal framework. The specific rights attached to preferred shares are defined ex ante, set out in the articles of association, and enforceable against all stakeholders.

This level of control is particularly valuable in sensitive environments. In a family-owned business, preferred shares make it possible to recognise enhanced operational involvement without disturbing formal equality between heirs or long-standing shareholders. In a managerial context, they allow a key executive to participate in value creation without immediately altering control dynamics.

Preferred shares therefore function as a precision instrument. Whereas ordinary shares bundle together capital ownership, economic returns and governance rights, preferred shares allow these dimensions to be adjusted independently. Differentiation may relate solely to economic returns, be triggered only upon specific events (sale, liquidation), or be contingent upon the achievement of predefined scenarios.

This modularity explains why preferred shares are especially well suited to situations where founders wish to avoid irreversible decisions. They provide flexibility, enabling anticipation of multiple future outcomes while preserving the overall coherence of the shareholder structure.

That flexibility, however, comes with heightened demands for rigour. A poorly calibrated differentiation—even if legally valid—can generate misunderstanding or long-term friction. The balance sought does not rest solely on legal compliance, but on proportionality between the rights granted and the beneficiary’s actual contribution.

At this point, preferred shares cease to be a purely technical tool and become a governance instrument. They reflect a strategic view of how value is allocated, how contributions are recognised, and how long-term stability is preserved.

Differentiation, in itself, is not an objective. It must be aligned with the company’s strategy, culture and development outlook. Failing this, preferred shares risk adding complexity rather than serving as a mechanism of controlled balance.

Rights attached to preferred shares under Swiss law

Swiss law offers considerable flexibility as to the rights that may be attached to preferred shares, provided that such rights are expressly set out in the company’s articles of association. This flexibility is a major advantage—but also a potential source of complexity.

Under the Swiss Code of Obligations, preferred shares may confer specific economic advantages over ordinary shares. These advantages must, however, be defined with clarity, internal consistency and legal enforceability.

In practice, the rights attached to preferred shares typically fall into the following categories.

A. Priority in dividend distributions

Preferred shares may carry a priority right to dividends, whether fixed, variable or cumulative. This mechanism ensures that the holder receives a preferential return before any distribution is made to ordinary shareholders—subject, of course, to the existence of distributable profits.

B. Preference upon liquidation or exit

This is one of the most commonly used features. Preferred shares may grant priority rights to liquidation proceeds or to sale proceeds in the event of an exit.

Such rights provide downside protection and play a decisive role in determining how value is allocated among shareholders in adverse or intermediate scenarios.

C. Conditional economic rights

Swiss law allows the introduction of conditional mechanisms, whereby certain rights are triggered only upon the occurrence of specific events—such as a sale, a change of control, the achievement of performance thresholds or the passage of time. These features strengthen the incentive dimension of preferred shares, while increasing their economic complexity.

D. Adjusted governance rights

Although preferred shares are most often associated with economic rights, they may also include adjustments to voting rights, within statutory limits. In practice, many structures deliberately combine enhanced economic rights with limited governance rights in order to preserve decision-making stability.

The diversity of rights that may be attached to preferred shares illustrates the freedom granted by Swiss law. Yet this freedom entails responsibility. The more numerous, hierarchical or conditional the rights, the more complex the economic analysis becomes.

For this reason, preferred share rights must never be assessed in isolation. Their value and impact must be evaluated holistically, taking into account the overall shareholder structure, plausible future scenarios and the strategic objectives pursued by the company.

This holistic analysis is all the more critical given that Swiss law—while permissive in structure—imposes strict safeguards to protect the rights of other shareholders.

Legal limits and risks of challenge

Although Swiss law provides broad latitude in structuring preferred shares, this freedom is not unlimited. It operates within a legal framework designed to preserve shareholder balance and prevent abuse—particularly in closely held or family-owned companies.

The primary safeguard remains the principle of equal treatment. Even where preferred shares are validly issued, the differential treatment they introduce must rest on a clear statutory basis and pursue an economically justifiable objective. Differentiation that is opportunistic or disproportionate may be challenged.

The Swiss Code of Obligations, particularly through its provisions governing amendments to the articles of association and shareholder protection, limits the ability of a majority to impose unfavourable conditions on a minority. A preferred share structure that effectively deprives ordinary shares of meaningful economic substance may be characterised as an abuse of majority power—even if formally authorised by the articles.

In practice, challenges most commonly arise in three situations:

Family disputes, especially during succession or inheritance, where certain heirs perceive an imbalance in economic rights;
Entry of an external investor, who conducts a detailed review of rights hierarchy and may question a structure deemed excessive or inconsistent;
Tax audits, where the economic justification or valuation of preferential rights is insufficiently documented.

A further risk lies in excessive rigidity. A preferred share structure designed for a specific context may become misaligned if the company’s strategy, scale or scope evolves. Such misalignment can fuel shareholder tension and complicate future strategic decisions.

These constraints do not undermine the relevance of preferred shares. Rather, they highlight that their effectiveness depends on a balanced approach—combining legal precision, economic coherence and forward-looking scenario analysis.

For this reason, the structuring of preferred shares should never be approached as a purely technical exercise. It must form part of a broader reflection on governance, transmission and long-term value creation.

Structuring preferred shares in family-owned and managerial contexts

The structuring of preferred shares is a decisive step, as it directly determines both the effectiveness of the mechanism and its long-term sustainability.

Proper structuring is not intended to create a one-off advantage, but to durably align economic, human and strategic interests.

A. Illustrative example – Swiss family-owned company

‍A Swiss public limited company is owned by a founder and two children, each holding one third of the share capital. One child has been actively involved in the business for several years, assumes key operational responsibilities and contributes directly to growth. The other child is not involved in the company.

Rather than modifying the shareholding structure, the company creates a specific class of preferred shares allocated to the active child. These preferred shares grant:

priority access to a portion of future dividends;
a capped liquidation preference in the event of a sale;
no additional voting rights.

In this way, operational involvement is recognised economically, without disturbing formal equality between heirs or undermining family governance.

‍B. Illustrative example – key executive

‍A fast-growing Swiss SME seeks to secure the long-term commitment of a senior executive critical to its development. Rather than granting ordinary shares, the company issues preferred shares carrying:

priority rights to sale proceeds above a defined valuation threshold;
activation solely upon an exit event;
no impact on day-to-day governance or control.

The executive is thus incentivised to maximise long-term value, while founders retain strategic authority.

Across both contexts, effective structuring rests on three core principles:

Clarity: rights must be understandable to all shareholders;
Proportionality: advantages granted must reflect actual contribution;
Anticipation: structuring must account for future events such as exits, succession or investor entry.

From a legal standpoint, preferred shares are primarily governed by the articles of association, often supplemented by a shareholders’ agreement. The former defines the rights attached to the shares, while the latter organises shareholder relationships and exit mechanics.

Well-designed and well-documented structures significantly enhance corporate stability and reduce the risk of future disputes.

Tax implications for preferred shareholders in Switzerland

Tax considerations play a central role in the analysis of preferred shares, particularly when they are granted to a child or an employee in recognition of specific involvement. In Switzerland, tax treatment depends not on the legal label of the instrument, but on the economic substance of the rights attached and the conditions under which they are granted.

A. Taxation upon issuance

Where preferred shares are issued on preferential terms, tax authorities may examine whether the beneficiary has received a taxable benefit in kind. If the economic value of the attached rights exceeds the price paid, the difference may be treated as taxable income.

In a managerial context, this benefit may be reclassified as employment income, subject to income tax and social security contributions. In a family context, the transaction may be analysed as an advance on inheritance or a transfer of wealth, depending on family relationships and the existence of genuine economic consideration.

In both cases, valuation at the time of issuance is critical. Insufficient or undocumented valuation significantly increases the risk of tax recharacterisation.

B. Taxation of dividends

Dividends received on preferred shares are generally subject to income tax, as with ordinary shares. However, preferential or enhanced dividends may attract closer scrutiny, particularly where returns appear disproportionate to invested capital.

Excessive preferential dividends may, in certain cases, be reclassified as disguised remuneration. The outcome depends on the economic coherence of the structure and the robustness of supporting documentation.

C. Taxation upon exit

As a general rule, capital gains realised by private individuals on the sale of privately held shares are tax-exempt in Switzerland. This principle also applies to preferred shares, provided the holder qualifies as a private investor.

That said, preferred shares may be examined more closely where their value was understated at issuance or where their rights are closely linked to employment. In such cases, partial reclassification of capital gains as taxable income cannot be ruled out.

D. The central role of valuation

From a tax perspective, preferred shares are never assessed in isolation. What matters is the economic value of the rights they confer.

An independent valuation helps to:

substantiate issuance or transfer prices;
mitigate recharacterisation risks;
secure the tax position of the beneficiary;
anticipate future tax consequences.

As a guiding principle:
In tax matters, the decisive question is not whether a share is “preferred”, but what economic value it actually confers on its holder.

Impact of preferred shares on company value

Preferred shares do not, in themselves, alter enterprise value, which remains driven by the company’s capacity to generate future cash flows. However, they can significantly affect the allocation of equity value among shareholders.

Preferred shares redistribute value according to a predefined hierarchy of rights. They neither create nor destroy value at the aggregate level, but they influence how value is shared across different scenarios.

From an investor or acquirer’s perspective, preferred shares introduce an additional layer of complexity. The key question becomes not only “What is the company worth?” but “How is that value allocated across exit scenarios?”

Significant preferential rights may reduce the economic value of ordinary shares, particularly in downside or mid-range outcomes. This effect is often underestimated—especially in family settings—and underscores the need for scenario-based analysis rather than reliance on a single valuation point.

Valuing preferred shares: approaches and methodologies

Valuing preferred shares is among the most technical exercises in corporate finance. Unlike ordinary shares, their value cannot be inferred by simple proportional allocation. It depends on the nature, hierarchy and conditionality of the attached rights.

A rigorous valuation focuses on a central question:
how is equity value allocated between share classes across plausible future scenarios?

Key approaches include:

Scenario-based allocation, analysing low, central and high outcomes;
Rights-based valuation, focusing on liquidation preferences, dividends and participation features;
Option-based methodologies, where rights exhibit asymmetry or conditionality.

When preferred shares embed option-like features—such as performance thresholds or conditional dividends—valuation techniques derived from option pricing models or binomial trees may be appropriate, particularly in growth or exit-driven contexts.

In Switzerland, the flexibility of corporate law heightens the importance of economic discipline. The more sophisticated the rights, the greater the potential gap between nominal and economic value.

‍A. A rights-based approach, not a capital-based one

The first step in valuing preferred shares is a precise analysis of the rights attached to them, including:

liquidation preferences;
preferential dividend entitlements;
participation mechanisms;
conversion features;
trigger conditions.

These rights determine how value is distributed among shareholders across different scenarios. Two shares representing the same percentage of share capital may therefore have radically different economic values.

Valuation must focus on economic entitlements, not on nominal ownership.

B. Scenario analysis and hierarchy of rights

A commonly applied approach consists in analysing equity value allocation across several plausible scenarios—typically downside, base case and upside outcomes. For each scenario, value is allocated to each share class according to the contractual hierarchy of rights.

This methodology makes it possible to:

identify scenarios in which preferential rights are effectively activated;
measure the asymmetry of return profiles;
highlight the protection or advantage granted to preferred shareholders.

This scenario-based reading is essential to understanding the true economic impact of preferred shares.

C. Option-based approaches: when preferred shares become structured instruments

When the rights attached to preferred shares are conditional, asymmetric or highly dependent on future company value, an option-based approach becomes particularly relevant.

In such cases, preferred shares may be analysed as hybrid instruments embedding one or more implicit financial options. Depending on the structure, valuation may rely on:

option pricing models;
binomial trees (CRR);
or adaptations of Black–Scholes–Merton methodologies to illiquid, non-listed assets.

These approaches allow explicit integration of:

equity value volatility;
liquidity horizon;
probability of activation of preferential rights.

They are particularly well suited to growth, succession or exit-driven contexts, where uncertainty plays a central role in the economic value of the rights granted.

D. Valuation as a governance tool in the Swiss context

Swiss corporate law allows considerable freedom in structuring preferred shares. This legal flexibility reinforces the need for economic discipline. The more sophisticated the rights, the greater the potential gap between nominal value and economic value.

In this context, valuation is not a theoretical exercise. It is a governance tool, enabling decision-makers to:

objectify the value of rights granted;
secure shareholder relationships;
anticipate implications in the event of fundraising, sale or succession.

E. Limits of simplified approaches

Simplified approaches based on mechanical pro rata allocations or “face value” reasoning are rarely appropriate for preferred shares. They tend either to underestimate protective rights or to overvalue poorly calibrated preferences.

A rigorous valuation requires modelling tailored to the specific structure of rights and a clear understanding of the company’s future scenarios.

Illustrative example: preferred shares with a conditional dividend and option-like features

A. Selected structure: performance threshold and preferential dividend

The company has implemented a preferred share structure featuring a conditional preferential dividend. When operational performance reaches a predefined threshold, the preferred shareholder receives an enhanced dividend compared to ordinary shareholders. Below that threshold, economic rights revert to parity.

This structure is common in family-owned and managerial contexts, as it allows:

alignment of interests with company performance;
limitation of economic advantage to favourable scenarios;
avoidance of immediate dilution of control.

Economically, this mechanism introduces return asymmetry, justifying an option-based interpretation.

B. Financial assumptions

The analysis is based on a prior valuation of the company using standard financial methodologies, establishing current equity value as the reference point.

Following this valuation, the reference value of an ordinary share is approximately CHF 230 per share, reflecting the company’s overall ability to generate future cash flows.

Because the preferential dividend is contingent upon performance, its economic benefit is neither certain nor permanent. Its value depends on the probability of achieving the performance threshold and on uncertainty surrounding the company’s future trajectory.

Based on these assumptions, the economic value of the preferential right is estimated at approximately CHF 1.2 million, corresponding to roughly CHF 60 per preferred share, given the number of shares concerned.

C. Economic value of the preferred share

The value of a preferred share is obtained by combining:

the reference value of an ordinary share;
the per-share economic value of the preferential right.

In this scenario, this results in an estimated preferred share value of approximately CHF 290 per share, compared with CHF 230 for an ordinary share.

This value differential reflects solely the structure adopted and the probability of activation of the preferential dividend. It does not result from control considerations or arbitrary advantages, but from a clearly identifiable and measurable economic mechanism.

D. Key takeaway for decision-makers

A preferred share with a conditional dividend cannot be valued as an ordinary share, nor as a simple yield enhancement. Its value arises from the combination of a reference equity value and a preferential right whose worth depends on future company performance.

Why an independent valuation of preferred shares is essential

Preferred shares are powerful instruments, but also sensitive ones. Their value does not stem from their legal label, nor from simple proportional rules applied to capital. It derives from specific—often conditional—rights whose economic impact varies significantly across scenarios.

An independent valuation is therefore not a comfort exercise. It is a cornerstone of sound governance.

It allows decision-makers to:

objectify inherently subjective differentiation;
prevent unintended shareholder imbalances;
secure legal and tax structuring;
facilitate future transactions;
anchor governance decisions in a long-term perspective.

By translating intention into measurable economic terms, valuation creates a common language between the human, financial and strategic dimensions of the company.

Final conclusion: granting preferential treatment is ultimately a matter of method

Swiss law offers significant flexibility in structuring share capital and recognising differentiated contributions. Preferred shares are a prime illustration of this flexibility. Used judiciously, they reconcile economic fairness, performance incentives and governance stability.

Throughout this analysis, one conclusion remains clear: the value of a preferred share cannot be decreed. It must be constructed through a global company valuation, a precise understanding of attached rights, and a rigorous assessment of future scenarios.

Granting preferential treatment without creating imbalance therefore requires a structured, method-driven approach grounded in independent valuation. Under these conditions, preferred shares cease to be perceived as complex or potentially contentious instruments and become what they are meant to be: effective governance tools serving entrepreneurial ambition.