Investor Trading

As a rule, preferred stocks carry some rights as to their share in assets in time of liquidation, whether voluntary or involuntary. This is usually limited to the stated par value, plus accrued dividends, plus sometimes an additional penalty. It is to be noted here, and also strongly emphasized, that any preferred claims are always junior to those of bondholders in the event of liquidation. In some instances where a corporation falls into financial difficulties, the sale of assets may leave little or nothing to satisfy the legal claims of the preferred stockholders after the bondholders have been paid off. From this point of view, it is obvious that the financial good health of any corporation is worthy of study.

Voting power is not conferred upon the preferred stockholders in most cases, although there is usually a provision that when arrears are accumulated such stockholders may have the right to elect a certain number of directors in order to protect their interests. In some cases this regulation comes into effect if the arrears amount to four successive quarterly payments; in others it may be specified in years, since the management must be given some opportunity to rectify matters. Still another kind of voting power given to preferred stockholders is that which permits them to vote as a class to block certain proposals which might endanger their rights and the rank of their stock. This veto power is most frequently applied to such matters as (a) proposed liquidation; (b) authorization of other preferred and/or bonded indebtedness; (c) proposed merger; (d) any change in the stated rights of the preferred shares.
In recent years there has been a considerable increase in the popularity of convertible preferred stocks, which bear with them a right to convert into the common stock of the issuing corporation at a stated rate; this rate may be on a share-for-share basis or may be a fraction, such as three quarters of a share of common for each share of preferred. Should the common be of increasing value throughout the years, it is evident that this conversion right may become very valuable. If the reverse is true, then the privilege may become entirely worthless. In some cases conversion rights may be in effect for a considerable length of time; in others there is a definite period during which they may be exercised and usually at a decreasing rate of conversion with the passage of time. At any rate, conversion rights must be protected against dilution through mergers, stock dividends, splits, etc., and such protection is usually provided in the articles. Some corporations achieve the same result as conversion by attaching common-stock purchase warrants to the preferred shares; these may be detached and returned to the corporation with the specified amount of cash required. As a rule such warrants are limited in time, but in a few cases they are specified as perpetual.