In most cases, preferred stock is actually a form of raising funds by borrowing from a joint stock limited company, and preferred stock shareholders cannot ask for withdrawal. Although preferred stock is the product of equity investment, investment agreements often contain provisions such as priority liquidation rights and repurchase. The following is the priority of preferred shares compiled by Bian Xiao, mainly in two aspects, hoping to help everyone.
What are the priority rights of convertible preferred shares?
1 When a joint stock limited company is liquidated due to dissolution, bankruptcy, etc., preferred shareholders may split the remaining assets of the company before ordinary shareholders.
When distributing the company's profits, it can be distributed in an agreed proportion before ordinary shares, but when it comes to the shareholders' rights and interests guaranteed by preferred shares, preferred shareholders can express their opinions and enjoy the corresponding voting rights.
Preferred shareholders generally do not enjoy the right to participate in the company's operation, that is, preferred shareholders do not include voting rights, and preferred shareholders have no right to ask about the company's operation and management.
Preferred shares can be redeemed by the company, but preferred shares are different from corporate bonds and bank loans, because the rights of shareholders of preferred shares to share profits and company assets can only be exercised after the company meets the requirements of creditors.
Generally speaking, from the perspective of the invested enterprise, if its own operating efficiency is good and its operating risk is small, the enterprise must give priority to debt financing instead of equity financing. Moreover, enterprises can be redeemed by joint stock limited companies according to the redemption clauses attached to preferred shares, and most preferred shares are attached with redemption clauses.
Main characteristics of preferred stock
First, preferred stocks usually specify the dividend yield in advance. Because the dividend rate of preferred shares is fixed in advance, the dividend of preferred shares generally does not increase or decrease according to the company's operating conditions, and it is generally not allowed to participate in the company's dividends, but preferred shares can get dividends before ordinary shares. For the company, because the dividend is fixed, it does not affect the company's profit distribution.
Second, the scope of rights of preferred shares is small. Preferred shareholders generally have no right to vote and stand for election, nor do they have the right to vote in the major operations of joint-stock companies, but they can enjoy the right to vote in some cases.
If the company's shareholders' meeting needs to discuss the creditor's rights related to preferred shares, that is, the creditor's rights of preferred shares take precedence over ordinary shares and are second to creditors.
The priority of preferred shares is mainly manifested in two aspects.
(1) Priority of dividend collection. The order of dividend distribution by joint-stock companies is preferred stock first and common stock later. No matter how much profit a joint-stock company makes, as long as the shareholders' meeting decides to distribute dividends, the preferred shares can get dividends at a predetermined dividend rate. Even if there is a general reduction or no dividend, the preferred shares should distribute dividends as usual.
(2) The priority of the distribution of surplus assets. When a joint-stock company is dissolved, bankrupt and liquidated, preferred shares have the priority to distribute the remaining assets of the company. However, the priority of preference shares is after creditors, but before common shares. Only after paying off the debts of the company's creditors, when there are surplus assets, the preferred shares have the right to distribute the surplus assets. Only after the preferred shares are claimed, the common shares will participate in the distribution.
There are many kinds of preferred stocks. In order to meet the needs of some investors who want to get some preferential benefits, preferred stocks have various classification methods. The main categories are as follows:
(1) cumulative preferred stock and non-cumulative preferred stock. Cumulative preferred stock refers to that in a certain business year, if the profits obtained by the company are not enough to distribute the specified dividends, the shareholders of future preferred stock have the right to demand full compensation for the dividends paid in the previous year.
For non-cumulative preferred shares, although the company has the right to receive dividends prior to ordinary shares in the current year, if the profits obtained by the company in the current year are not enough to distribute dividends according to regulations, shareholders of non-cumulative preferred shares cannot ask the company to reissue them in future years. Generally speaking, for investors, accumulated preferred stock has greater advantages than non-accumulated preferred stock.
(2) Participating preferred shares and non-participating preferred shares. When the profit of an enterprise increases, in addition to enjoying interest at a given interest rate, it can also participate in profit distribution with common shares, which is called "participating in preferred shares". In addition to the established dividends, the preferred shares that no longer participate in profit distribution are called "non-participating preferred shares". Generally speaking, participating in preferred shares is more beneficial to investors than not participating in preferred shares.
(3) Convertible preferred stock and non-convertible preferred stock. Convertible preferred stock refers to allowing preferred stock holders to convert eugenic shares into a certain number of common shares under certain conditions. Otherwise, it is non-convertible preferred stock. Convertible preferred stock is more and more popular in recent years.
(4) callable preferred shares and irrecoverable preferred shares. Redeemable preferred stock refers to the company that is allowed to issue such shares and will recover the existing preferred stock at the original price plus some compensation. When the company thinks it can pay a lower dividend.