Usage
Preferred stocks offer a company an alternative form of financing; in most cases, a company can defer dividends by going into arrears with little penalty or risk to its credit rating. With traditional debt, payments are required; a missed payment would put the company in default.
Occasionally companies use preferred shares as means of preventing hostile takeovers, creating preferred shares with a poison pill (or forced-exchange or conversion features) which are exercised upon a change in control. Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These "blank checks" are often used as a takeover defense; they may be assigned very high liquidation value (which must be redeemed in the event of a change of control), or may have great super-voting powers.
When a corporation goes bankrupt, there may be enough money to repay holders of preferred issues known as "senior" but not enough money for "junior" issues. Therefore, when preferred shares are first issued their governing document may contain protective provisions preventing the issuance of new preferred shares with a senior claim. Individual series of preferred shares may have a senior, pari-passu (equal), or junior relationship with other series issued by the same corporation.
Read more about this topic: Preferred Stock
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