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Feature |
Overview |
Liquidation preference
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Preferred stock holders have a claim on an issuer’s assets senior to common shareholders and subordinate to bondholders and other creditors
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Dividends
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Generally, preferred stock holders receive dividends before common shareholders; the dividend is typically fixed and may be cumulative or non-cumulative
Preferred stock holders may be entitled to receive additional dividends when dividends are paid to common shareholders (participating preferred stock)
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Voting
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Preferred stock may be voting or nonvoting; some preferred stock may have voting rights for certain extraordinary events (e.g., a takeover of the issuer, the issuance of new shares)
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Term
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Preferred stock may be perpetual, mandatorily redeemable on a specified date, or contingently redeemable either upon election of the holder, occurrence of an event, or at a point in time
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Conversion option
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Convertible preferred stock either requires or permits the holder to convert the instrument into equity securities of the issuer. Some convertible preferred shares are convertible only upon the occurrence of a specified contingent event (e.g., upon an IPO)
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Put option exercisable by the holder
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Preferred stock may be puttable at the option of the holder after a certain period (e.g., 5 years), or upon the occurrence of an event (e.g., a change in control)
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Call option exercisable by the issuer
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Preferred stock may be callable at the option of the issuer after a certain period or upon the occurrence of an event (e.g., a change in credit rating or change in tax or regulatory capital treatment)
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Type |
Liability or equity* |
Mezzanine or permanent equity |
Mandatorily redeemable without a substantive conversion option |
Liability |
Not applicable |
Mandatorily convertible into a variable number of equity shares based on a fixed monetary amount |
Liability |
Not applicable |
Mandatorily convertible into a variable number of equity shares when the monetary value is based on other than the fair value of the issuer’s equity shares (e.g., S&P 500 index) |
Liability |
Not applicable |
Mandatorily redeemable with a substantive conversion option |
Equity |
Mezzanine equity |
Redeemable (puttable) at the holder’s option |
Equity |
Mezzanine equity |
Contingently redeemable (puttable) at the holder’s option |
Equity |
Mezzanine equity |
Redeemable (callable) at the issuer’s option |
Equity |
Permanent equity when holder does not control the board (see below) |
Contingently redeemable (callable) at the issuer’s option |
Equity |
Permanent equity |
No redemption (perpetual preferred stock) |
Equity |
Permanent equity |
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