COMPANY LAW

Company Law



Company Law

Question

'A cumulative 4% preference share, with priority as to return of capital in liquidation, has superior dividend rights compared with ordinary shares. However it does not stand in such a good position when it comes to statutory pre-emption rights, s.641 capital reduction procedures and influence in general meetings.'

Answer

A preferred share is a special type of stock that pays a fixed amount regularly drawn out of the company's profits, or dividends. These are called preferred shares, as they give profits ahead of common shareholders regarding payment of dividends (Cerioni, 2007). Unlike common shares, preferred shares are not entitled to share in a company's success. The rights of the holder of preferred shares are limited to a fixed amount of dividends and a right of priority over common shareholders in the event of business bankruptcy and liquidation of its assets.

Preferred shareholders may exercise their voting rights only if the company misses a number of dividend payments. If the company becomes profitable again, the preferred shareholders are usually entitled to the dividend payments paid before common shareholders. The preferred shares do not have this provision are called preferred shares to non-cumulative.

In many ways, preferred shares are like bonds, except that they have no fixed maturity date. They are often issued at a nominal value, usually $ 25, $ 50 or $ 100. The fixed dividend payments, mostly carried out every three months, is similar to the interest payment of an obligation. Preferred shares behave the same way as bonds when interest rates move. Thus, when rates fall, the preferred share prices rise and vice versa.

The characteristics of preferred shares are very similar to bonds. Convertible preferred shares can be exchanged against shares of the company. Often, preferred shares are redeemable at the option of the issuer, which allows the company to redeem whenever she wants, at a fixed price. The preferred shares redeemable at the holder's actions can make to the company at a given price, on certain dates. The issue of sinking fund aims to provide the company with the resources they need to buy a number of preferred shares each year.

Risk

Since preferred react to changes in interest rates, you may get an amount less than their purchase price if interest rates rise and you need to dispose of. Indeed, as interest rates fell, the performance of your preferred shares will likely be less advantageous than other investments. You will need to consent to obtain a lower price to attract buyers.

There is also the risk that the company will do badly and no longer has the financial resources to pay dividends. If applicable, you may need to also sell your shares at a loss, other investors will not be interested in buying preferred shares that do not pay dividends.

If the business fails, you will probably lose money, but probably less than if you had bought shares. The preferred shares are entitled to a fixed amount if the company ...