Preferred Stock Voting Rights: Everything You Need to Know
Preferred stock voting rights occur when an investor has purchased top shares within a public company. 3 min read
2. Importance of Preferred Stock
3. Preferred Stock Classes
Preferred Stock Voting Rights
Preferred stock voting rights occur when an investor has purchased top shares within a public company. Stocks can be designated into several categories. The two most important stock classes are preferred and common stock, and both classes differ in terms of rights. For instance, most stock shares are called common shares. If you own common stock, then you’re considered a partial owner of a company. Also, you get various voting rights when it comes to company decisions.
Usually, common stockholders receive a single share for each vote when electing a board of directors. With that, the number is not usually in direct proportion to the share number that’s owned. The directing board comprises a group of personnel that represents the interests of the owners and the business while overseeing important company decisions.
Moreover, common stockholders also receive voting rights pertaining to company matters in the form of company objectives and stock splits. With voting rights also comes preemptive rights, allowing common shareholders to keep a proportional stake in a company in case that company commences another stock offering. This means that common holders with preemptive rights can purchase new stock shares in relation to their ownership of the business.
Even though common stock gives holders access to various privileges and rights, it does come with a vital drawback. First, common stock owners are last when accessing company assets. This also means that common stockholders get dividends only after all preferred stockholders have been compensated.
In addition, if a business enters bankruptcy, common stock shareholders receive any assets remaining after the following parties have been fully paid:
- Preferred Stockholders
Also, common stock does not always entitle you to a single vote for each share owned. Other companies have tiers of common stock that vary on the number of votes attached.
- Example: A sole share of stock class A in a corporation may permit 10 votes for each share, and a single share of class B stock in that same company may only allow a single vote per share.
There are also cases where a certain common stock class will have no voting rights whatsoever. Companies offer such an option because it’s an easy method for prime owners (founders) to maintain greater control of the company. The business would usually issue stock classes, with the fewer voting numbers going to the public, and the reserved stock goes to the owners. It should be noted that such an arrangement is not always the best course for common shareholders. If you place a high value on voting rights, you may want to think twice before purchasing stock that’s divided into various classes.
Importance of Preferred Stock
Preferred is different in the respect that it does not include the same voting benefits as common stock. Moreover, preferred stock comes with an established dividend that does not change, even though the company is not obligated to pay the dividend if it does not have the funds to do so. The primary benefit of owning preferred stock is that you have a greater claim to company assets than common stockholders. Preferred holders always get dividends before common holders in case a company enters bankruptcy, and the preferred holders are always paid first.
Preferred stock mixes aspects of debt in the respect that it pays established dividends and equity since it can appreciate. Preferred shareholders not only have priority over common stockholders in terms of dividends, but the dividends are usually higher, and they can be paid quarterly or monthly.
Such dividends can be in a fixed amount or established in a benchmark interest. Adjustable-rate shares determine various factors that include dividend yields, and the participating shares can pay added dividends when it comes to common stock dividends or company profits. Preferred stockholders get dividends that are based on certain factors dictated by a company when an IPO occurs.
In the past decade, new preferred issuance tends to come with floating rate dividends to lower the interest rate, while adding greater competitiveness in the marketplace.
Preferred Stock Classes
You should be aware of four preferred stock classes.
- Cumulative: Such shares allow owners to accumulate dividend payments that may have skipped because of financial hurdles.
- Non-Cumulative: These shares do not give owners access to any skipped dividends.
- Convertible: These shares can be transformed into a determined number of common stock.
- Participating: Such shares get higher-than-average dividends compensation if a company generates a larger-than-projected profit
To learn more about preferred stock voting rights, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will go over any questions you have regarding voting rights and your roles and obligations as an investor. In addition, they will go over any agreements or will remain at your side during any legal disputes.