28 Aug 2013

Preference Shares

Unlike common stock, preferred stock usually has several rights attached to it:
  • Almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount
  •  The core right is that of preference in the payment of dividends and upon liquidation of the company. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied
  • The dividend rights are often cumulative, such that if the dividend is not paid, it accumulates from year to year
  • Preference shares have a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim
  • Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time
  • Usually, preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. Individual series of preferred shares may have a senior, pari-passu or junior relationship with other series issued by the same corporation
  • Occasionally, companies use preferred shares as a mean of preventing hostile takeovers, creating preferred shares with a “poison put” or forced exchange/conversion features that are exercised upon a change in control
There are various types of preferred stocks that are common to many corporations:
  • Cumulative Preferred Stock – if the dividend is not paid, it will accumulate for future payment
  • Non-cumulative Preferred Stock – dividends for this type of preferred stock will not accumulate if they are unpaid. Very common in bank preferred capital, since under BIS capital adequacy requirements, preferred stock must be non-cumulative if it is to be included in Tier 1 capital
  • Convertible Preferred Stock – this type of preferred stock carries the option to convert into common stock at a prescribed price
  • Participating Preferred Stock – this type of preferred stock allows the possibility of an additional dividend above the stated amount under certain conditions
  • Perpetual Preferred Stock – have no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date
  • Puttable Preferred Stock – such issues have a “put” privilege whereby the holder may, upon certain conditions, force the issuer to redeem the stock

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