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Preferred shares

 

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The so-called preferred shares are a class of shares which, unlike ordinary shares, usually carry additional rights above and beyond those afforded to ordinary shares.

Such rights may include:

  • precedence over ordinary shares when it comes to the distribution of profits and the liquidation proceeds of a stock corporation;
  • superior voting rights generally, or 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;
  • anti-dilution provisions that prevent the issuance of additional shares at prices below those of the preferred shares;
  • participation rights to have a right of first refusal with respect to the issuance of new shares; and
  • dividend rights or cumulative dividend rights (cumulative dividend rights accumulate during periods when they are not paid).

The above list, while listing several customary rights, is far from comprehensive. Preferred shares may, in the nature of a contract, specify nearly any right conceivable to holders.

Preferred shares are more common in private companies where it is more common to distinguish between the control of, and the economic interest in, a company. Also, government regulations and the rules of stock exchanges discourage the issuance of publicly traded preferred shares.

Preferred shares are often named in classes. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred", "Series B Preferred", "Series C Preferred" and common stock.

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