Cumulative shares give the right to. Preferred share and its types
Preference shares- this is a special type of equity securities, which, unlike ordinary shares, have special rights, but also have a number of specific restrictions.
Preferred shares are a common financial instrument in Russia and around the world.
It allows the owner to receive a guaranteed income based on the dividend rates offered by the issuer of the securities.
Also, in some cases, the holder of such shares can influence the company’s development strategy.
Advantages of preferred shares
Preferred shares have a number of advantages for investors when compared to ordinary securities.
Firstly, the owner of preferred shares is almost always guaranteed some income.
Namely, preferred shares accrue a fixed income, unlike ordinary shares, which depend on the profit of the joint-stock company.
However, dividends are not paid if the company has incurred losses.
Secondly, funds for the payment of dividends are allocated to holders of such securities as a matter of priority.
That is, holders of preferred shares also have the right to receive part of the property of the joint stock company in the event of its liquidation, before it is divided among other owners.
Thirdly, dividends on preferred shares are usually fixed in the total net profit.
In addition, these shareholders may have additional rights specified in the company's charter documents.
For example, they may, under certain conditions, convert their preferred shares into .
Disadvantages of preferred shares
There are also disadvantages to owning preferred shares:
The issuing company may demand the shares back from the shareholder without giving reasons, while fully compensating the damage with interest;
Preferred shares often do not carry voting rights. That is, holders of privileged rights are deprived of the right to vote and, thus, deprived of the opportunity to participate in the management process of the joint-stock company and make decisions important for society;
Fixed dividend amount. Often the amount of dividends is indicated when issuing securities of this type and does not depend on the size of the company’s profit, which, with an increase in business profitability, entails a proportional decrease in the profitability of these securities.
How are preferred shares different from ordinary shares?
The very name “preferred” shares suggests that such shares provide additional opportunities and rights, so to speak, a special status.
As a rule, such benefits include the payment of guaranteed dividends.
That is, the owner of preferred shares will receive payments regardless of how the shareholders are doing - the joint stock company will receive profits or losses.
Also, unlike ordinary shares, preferred shares give the right to receive a share of the company's assets after its liquidation.
That is, the preferred shareholder will receive a predetermined amount from the joint stock company.
For such benefits, the owner of preferred shares is deprived of the opportunity to participate in voting and influence the decisions of the joint-stock company.
Thus, the owner of such shares is an indifferent investor, so to speak, not a co-owner of the business, which cannot be said about those who own ordinary shares.
However, some cases of privileges may involve just influence on the affairs of the company. In this case, the charter of the joint-stock company provides for the ratio of votes of owners of ordinary and preferred shares, for example 1:2. So, it turns out that the owner of one preferred share has two votes.
Certain cases provide the right to influence the affairs of the company and participate in meetings to those owners who cannot vote.
Such cases are also provided for by law to protect the interests of owners. Thus, the holders of all shares issued by the company can influence decisions related to the liquidation or reorganization of the company.
There are also issues relating to shareholders that cannot be resolved without their participation. For example, when guaranteed dividends are reduced.
If the JSC is unable to pay guaranteed dividends, then the preferred shareholder receives full right to participate in company meetings on all issues.
It's also worth noting that preference shares can be convertible and cumulative.
Rights of preference shareholders
Holders of preferred securities, on the same basis as the main shareholders, receive a share in the authorized capital of the company and have the right to attend general meetings.
Despite the fact that the holder of such securities does not have voting rights, he can participate in shareholder meetings and claim a share of the property upon liquidation of the organization.
Admission to voting
In general, holders of preferred shares are not allowed to vote.
An exception may be cases when decisions made during the relevant negotiations affect the personal interests of the owners of securities.
In particular, if there are particularly important issues on the meeting agenda, preferred asset holders can vote. These may be questions reflecting the procedure for a possible reorganization of the company or liquidation of the company, those related to making adjustments to the charter, those related to the rights of holders of preferred shares or, for example, the payment of dividends.
Types of preferred shares
Preferred shares are divided into classes with varying amounts of rights.
According to the Law of the Russian Federation “On Joint-Stock Companies,” there are basically two main types of preferred shares: cumulative and convertible.
Dividends on cumulative preferred shares may not be paid in normal reporting periods by decision of the general meeting of shareholders if there is no profit or if it is completely used for the development of the company.
At the same time, the obligation to pay lost income remains.
Dividends are accumulated and paid after the financial position of the joint stock company has stabilized.
That is, the peculiarity of cumulative preferred shares is the accumulation of dividends. Owners of cumulative preferred shares have the right to accumulate unpaid dividends, accrue them and pay them in the period following the missed period. In this case, dividends are not subject to periodic payment.
The holder of a cumulative share acquires the right to vote at a meeting of shareholders for the period during which he did not receive dividends, and loses it after the payment of dividends.
Convertible preferred stock can be exchanged by the owner of the stock during a specified period for common stock or another type of preferred stock.
When issuing such securities, the rate, proportionality and exchange period are determined.
There are also the following types of preferred shares:
non-cumulative, for which unpaid dividends are not added to the dividends of subsequent years;
unconverted, which cannot change their status;
with participation shares that entitle the holders of these shares to receive additional dividends in excess of the stipulated dividends.
Results
The advantages of preferred shares include the shareholder's rights:
receive a fixed income or income in the form of a percentage of the value of shares, or a certain amount of money that is paid regardless of the results of the joint-stock company’s activities;
to receive dividends first;
for preferential participation after satisfying the creditors' claims in the distribution of property remaining with the joint-stock company upon its liquidation;
for an additional payment if the amount of dividends paid on ordinary shares exceeds the amount of dividends paid on preferred shares.
Note that if you want to invest in long-term investments, then the method of purchasing preference shares is the most suitable.
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Preference shares: details for an accountant
- Justification of revenues in terms of financial and economic activities
2,000 common shares and 800 preferred shares. According to the forecasts of the joint-stock company, per... pcs. with a par value of 1 thousand rubles, preferred shares - 500 thousand pieces. with a nominal value of 1 ... thousand rubles. Dividends on preferred shares are 8% of the par value of the share... let's calculate the annual amount of dividends on preferred shares: Income plan 2019 (2020, 2021...
- Key indicators of the economic strength of the enterprise and the level of performance of its owner and management team
Registered shares are securities issued in the name of a specific person and registered in the register of a shareholder company. In other words, these shares must bear the name of their owner.
The specified person is a full member of the company's board of shareholders.
The sale and transfer of registered stocks occurs in two ways
1. Entering information about the change of owner into the company register, issuing the corresponding certificate to the new shareholder
2. Applying an endorsement on the certificate itself, after which it is also necessary to enter it into the register.
In addition to the data of the new owner, it is also necessary to indicate the date of transfer and confirm it with the signature of an official. The endorsement on the reverse side of the share is called an endorsement.
Naturally, they have value only when they are in the hands of a registered owner, in contrast to bearer shares, the owner and beneficiary of which can be absolutely any unregistered person. The main purpose of the existence of registered shares is strict accounting of the company's shareholders and the avoidance of attracting unwanted capital to the company.
Actually, at the birth of the securities market, there were only registered shares.
Of course, if a company issues exclusively registered shares, and not preferred ones, this significantly increases its prestige.
Types of registered shares
A subtype of registered shares is vinculated shares. They can be transferred to third parties only with the permission of the issuer - company, joint stock company. The purpose of their issue is precise control over the composition of shareholders. Essentially, this is a tool for prohibiting the sale and transfer of shares to undesirable persons.
Preferred shares are also registered; their owners have the right to receive dividends in a fixed and priority order. A subtype of preferred shares are convertible shares that can be exchanged for ordinary shares at a predetermined ratio.
Registered ordinary (common) shares mean that their owners receive dividends on a residual basis after holders of preferred shares.
Cumulative shares are registered, preferred shares that provide the right to receive dividends accumulated during the period when, for any reason, the company did not pay them.
Another type of registered shares is convertible - they can be exchanged for ordinary and preferred shares at a strictly fixed price within a specified period.
Cumulative shares are ordinary securities that are issued to shareholders in lieu of dividends. The very concept of “cumulative” has a cumulative nature in relation to the object with which it is used.
Let's consider what cumulative shares mean in stock trading, their distinctive features and varieties. First of all, it should be noted that they are privileged and ordinary.
Ordinary cumulative securities
Regular securities usually give voting rights to the shareholder at the relevant meeting of the company, however, this is not a guarantee that the shareholder will receive dividends. In other words, receiving dividends is possible only if a decision is made at a meeting of shareholders to allocate partial profits of the joint-stock company for their payment, and also if, after paying off priority obligations, which include payments on preferred securities, the enterprise will have funds left.
An ordinary cumulative share is a security for which payment is made not in cash, but in the same ordinary shares of the enterprise. In simple words, the owner of securities replenishes his own capital by increasing their number in the investment portfolio.
The main distinguishing feature of ordinary cumulative securities is that the above payment, made in the form of shares and not in cash, is not subject to income tax deduction.
Preferred cumulative securities
Preferred shares are not cumulative in the following case - if payments on them are made in priority order. This happens if the joint stock company received such a profit for the current period that it is not possible to pay dividends to all owners of the securities. As a result, only shareholders owning preferred securities remain priority. If the company suddenly goes bankrupt, they will also receive their share of the payments first. However, there are also disadvantages here - central banks of this type do not provide voting rights at a meeting of the company’s shareholders, and their holder does not have the right to participate in the management of the joint-stock company.
It should be noted that if a debt arises on the above shares, shareholders owning this type of securities are given the right to vote at shareholder meetings until the debt is fully repaid. This is a kind of motivation for quick settlements with holders of preferred securities.
Cumulative preferred shares are securities on which dividends can be accumulated. In other words, if for a certain reason they were not paid, or dividends were paid partially, the unpaid amount is added to the subsequent payment. In this case, debt repayment is carried out again as a matter of priority, before dividends are accrued on other shares, both ordinary and preferred.
If a joint stock company is experiencing financial difficulties and is unable to fully fulfill its obligations to shareholders, dividend payments may be suspended to allow the company to focus on paying off certain debts and expenses. After the company gains stability and resumes dividend payments, shareholders - whether ordinary or preferred - will not be compensated for payments for the period of financial difficulties of the company. Moreover, payments will not be made until the company pays dividend debts to the owners of preferred cumulative securities.
Cumulative shares and non-cumulative shares also differ in that in this case the owners of cumulative shares will be paid the debt in full, even for the period in which payments were suspended.
Dividend calculation example
Consider the following example. Let's assume that the company issued shares with a par value of 1,000 US dollars. The annual interest rate is 5%. A year later, another economic crisis occurred. The company that issued the securities is not able to pay dividends to them in full, but can only pay 50% of the amount. As a result, the owners of the securities receive a dividend profit per share of 25 US dollars and the company owes them the same amount.
A year later, the financial situation of the company worsened and dividend payments were suspended completely. At the same time, the debt on preferred cumulative securities increases by another 50 US dollars. Consequently, the amount of debt of this joint stock company reaches 75 US dollars per share.
A year later, the company overcomes the economic crisis and begins paying dividends again. In such circumstances, priority is given to the debt on the cumulative preferred notes in the amount of US$75 per share together with the current amount of US$50. The total dividend amount is $125.
Only after repayment of the debt can the joint-stock company resume payments on other types of shares, starting with preferred and ending with ordinary shares, if at that moment the company still has cash left.
A share is a security whose circulation period is not limited and which confirms the property and non-property rights of its holder. It represents one of the objects of civil rights, and therefore it is very important to determine the legal nature of shares, their varieties and resolve other issues.
Classification
The shares are:
1) by way of designating the rights holder bearer (without designation of the name of the authorized person) or registered (with designation) securities;
2) depending on the nature of the rights expressed monetary (guarantee the receipt of funds) and investment (guarantee participation in the management of a legal entity);
3) as well as issue-grade securities, since:
- placed for sale in issues;
- are assigned to a set of property and non-property rights that may be subject to assignment, confirmation (certification) and unconditional implementation in compliance with the procedure established by law;
- have the same value and terms for exercising the right within the issue, regardless of the period of acquisition of the shares.
Precisely because they are issue-grade securities, they are objects of the securities market.
Shares can only be issued by joint stock companies: both closed and open.
The issue of shares by an open joint-stock company includes an open subscription, registration of shares and their actual placement on the terms and conditions of the subscription. An open subscription for shares is the placement of shares among an unlimited number of persons. Closed joint stock companies, in turn, issue shares with private subscription. A closed subscription for shares is the placement of shares among a limited circle of persons, that is, among the shareholders of the company.
Simple, privileged, cumulative
Let's start with shares, which in any case are available in a joint stock company. Common shares are securities that confirm the right of their owner to receive part of the organization’s profit (dividend), to participate in the management of a joint-stock company and the right to a share of the property of a legal entity upon its liquidation. The name of such promotions speaks for itself.
Let's move on to the types of shares, the share of which in the authorized capital of a legal entity cannot exceed twenty-five percent. And these are preferred shares.
They are securities that:
- give their holder the right to receive a certain fixed, that is, stable interest;
- guarantee the owner the right of ownership in the event of liquidation of a legal entity;
- but do not allow participation in the management of the joint stock company.
The decision to issue is made by the legal entity itself.
Cumulative shares can be called a type of preferred shares. Cumulative shares are This type of preferred shares, dividends on which are not paid, but are subject to accumulation in a special fund of the joint-stock company for the period when the joint-stock company was experiencing serious financial difficulties and could not distribute profits among participants. The debt to the holder of cumulative shares is repaid before the payment of dividends on ordinary shares.
In relation to shares, it is important to understand the concept of book value and issue value of shares.
The book value of shares is the value of shares according to accounting and reporting data. It consists of the size of all non-current and current assets minus the long-term and short-term liabilities of the joint-stock company.
The book value of common shares can be determined in two ways:
1) by subtracting the par value of preferred shares. This option applies if issued by an organization;
2) the amount of equity capital, consisting of the statutory background, reserves and net profit.
In this case, there is the following dependence: the higher the book value of the shares in comparison with the nominal value, the higher the degree of security of the share with the assets of the legal entity. Conversely, if the book value is below par, then the shares have a low degree of asset backing. This is why stocks with high book value are easier to sell.
At the same time, book value does not reflect the real value of assets. For example, land is accounted for at its acquisition price. Over time, its value will change, but the book value of the share will not reflect this.
The issue price of a share is the price at which the security was sold during its initial offering. It cannot coincide with the nominal value. The difference between the issue price and the nominal value, multiplied by their total number, is the company's share premium.
Innovations in promotions
The realities of today have necessitated a change in the method of recording the rights of security holders, and, as a result, uncertificated securities have emerged.
Uncertificated shares – This securities, the rights to which are confirmed by an entry in the securities register system or an entry in a securities account. The register can be maintained in printed or electronic form. A person who has the right to a security has the right to demand from the person who maintains the register the issuance of a document evidencing the assigned right. This will be an extract from the register of share owners or an extract from the owner's account. But you need to remember that the extract itself is not a security.
Uncertificated shares have a number of advantages, namely:
- It is cheaper to issue uncertificated shares. The need to provide documentary shares with several degrees of protection significantly increases their cost. Especially when a small number of shares or a significant number of low par shares are issued;
- loss of uncertificated shares is possible only in the event of a computer failure;
- Owning uncertificated shares does not incur storage costs.
A preferred share, unlike an ordinary share, does not give the right to vote at the general meeting of shareholders, and the privileges of the owner of such a share are that the charter must determine the amount of dividend and/or the cost paid upon liquidation of the company (liquidation value), which are determined in a fixed amount of money or as a percentage of the par value of preferred shares. However, the law defines cases when the owner of a preferred share receives the right to participate in the general meeting of shareholders with the right to vote when resolving issues:
- on the reorganization and liquidation of the company;
- on introducing amendments and additions to the company's charter, limiting or changing the rights of shareholders and owners of preferred shares.
- The owner of preferred shares also receives the right to vote if at the annual meeting of shareholders a decision is made on non-payment or incomplete payment of established dividends.
The law on joint stock companies provides for the issue of one or more types of preference shares. There are two types of preferred shares: cumulative and convertible.
Cumulative shares are those for which the unpaid or incompletely paid dividend, the amount of which is determined in the charter, accumulates and is paid subsequently. The issue of such shares can attract investors with the opportunity to increase their income. If the owner of a preferred share of this type decides to sell it if dividends are not paid, he will be forced to sell it at a low market value. Whoever bought such a share has the opportunity to receive dividends for the entire period during which they were not paid.
The owner of a cumulative preferred share receives voting rights for the period during which he does not receive a dividend, and loses this right from the moment all accumulated dividends on the specified share are paid in full.
When issuing convertible preferred shares, the possibility and conditions of their conversion into ordinary shares or other types of preferred shares must be determined. When issuing convertible shares, the period, proportionality and exchange rate must be established. The exchange period for convertible shares must be at least three years. The conversion rate is set at the time such shares are issued and is slightly higher than the current market price for the common shares at that time. Therefore, if during the established exchange period the current market price of common shares exceeds the conversion rate, the owner of a convertible preferred share has the opportunity to receive additional income by exchanging his share at the conversion rate and immediately selling it at a higher rate. This option allows the issuer to set a lower dividend on convertible preferred shares than on other types of preferred shares. If the exchange period has expired and the owner of the convertible preferred share has not exchanged it for any other share, it is recognized as a direct (simple) preferred share.
The charter may give the owner of a convertible preference share the right to vote at a general meeting of shareholders, and the number of votes must correspond to the number of ordinary shares for which his preference share is exchanged. By law, a joint stock company can issue two or more types of preferred shares. Revocable, or returnable, preferred shares have become widespread abroad. Their essence is that they can be redeemed, unlike ordinary ones, which cannot be redeemed as long as the joint stock company that issued them exists. A joint stock company can provide revocation or repayment in different ways:
- Redemption with a premium. The premium acts as a kind of compensation to the investor for losing his source of income. In this case, the repurchase can occur in full at any time after notification of the repurchase or in parts within the established time frame. Redemption occurs at a price that is set above the face value, taking into account unpaid dividends.
- Redemption through buyout or deferred funds. The formation of a redemption fund makes it possible to annually repurchase a certain part of revocable preferred shares through the secondary market and thereby help stabilize the market for one’s shares. A deferred fund is formed by a joint stock company in order to make redemptions at a premium.
- Providing guarantees for early redemption at the initiative of the holder through the issuance of so-called retractive preferred shares. Their issuance is resorted to when the issuer does not have absolute guarantees of recall of preferred shares through redemption through redemption. When issuing these types of preferred shares, the holder himself sets the redemption period, notifies the issuer about this and presents them when the redemption period arrives.
A joint stock company may issue preferred shares with a participation interest. Such shares entitle its owner not only to a fixed dividend established upon its issue, but also to an additional dividend if the dividend on ordinary shares at the end of the year exceeds it.
In foreign practice, preferred shares with a floating dividend rate, focused on the yield of any generally recognized securities (for example, in our practice, on the yield on GKOs), are becoming widespread.
Guaranteed preference shares may be issued. Such shares may be issued by subsidiaries. In this case, the dividend on preferred shares is guaranteed by the reputation of the parent organization. This should attract investors to purchase shares in the subsidiary.
In Russia, there are specific preferred shares: types A and B. They appeared during total privatization. Preferred shares of type A were issued during the creation of open joint-stock companies and were intended for employees of the transformed enterprises, who received them free of charge. The number of preferred shares of type A is 25% of the authorized capital, and 10% of net profit is allocated for the payment of dividends on these shares. These shares give owners the right to attend annual meetings of shareholders and make proposals on issues discussed, but do not give them voting rights. The owners of such shares have the right to freely sell them.
Preferred shares of type B were issued against the share of the authorized capital owned by the property fund, and the property fund became the owner of such shares, which also received them free of charge. To pay dividends on such shares, 5% of net profit is allocated, but the size of the dividend on them should not be lower than the dividend paid on ordinary shares. The number of such shares should not exceed 25% of the authorized capital. The Property Fund, which is the holder of shares of this type, has the right, without the consent of other shareholders, to freely sell them to an unlimited number of buyers, however, upon their sale, they are automatically converted into ordinary shares. The holder of type B preferred shares does not have voting rights, although he can attend shareholder meetings and make proposals on the issues discussed.
According to the new legislation, preferred shares can be given a number of properties. Thus, the charter of a joint stock company may provide for the issue of cumulative shares. The cumulative property implies that dividends or a certain part of them in the event of non-payment accumulate and are fully paid subsequently.
Another property of preferred shares is conversion. In this case, the owner of a preferred share is given the right to exchange it for a share of another type. In this case, the charter may provide for the right to vote on such preferred shares.
So, preferred shares:
- practically risk-free;
- their dividend rate may even exceed the rate on ordinary shares;
- but they do not allow the owner to participate in the management of the organization.
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