Preferred shares are a special type of equity securities that, unlike ordinary shares, have special rights, but also have a number of specific restrictions.
General information about preferred shares
Fixed income is accrued on preferred shares, in contrast to ordinary shares, the dividends of which depend on the profit of the joint stock company. However, dividends are not paid if the company incurred losses during the reporting period. Holders of preferred shares also have the right to receive part of the property of a joint-stock company in the event of its liquidation before it is divided among other owners. In addition, these shareholders may have additional rights specified in company documents. For example, they may, subject to certain conditions, convert their preferred shares to common shares.
However, the rights of the owner of preferred shares to participate in the management of the company may have significant restrictions. As a rule, such shareholders organize an independent group, which has the right to veto some decisions of the company's management.
The rights and restrictions of preferred shares may vary significantly from one country to another in different countries and companies, as they are established by national laws and company statutes. In the Russian Federation, the par value of preferred shares must not exceed 25% of the authorized capital of a joint stock company. Now on the Russian stock exchanges there are trading in preferred shares of such joint-stock companies as Sberbank, Lukoil, Rostelecom, AvtoVAZ, Surgutneftegaz, Tatneft, etc.
Varieties of preferred shares
Preferred shares are divided into classes with different scope of rights. The Law of the Russian Federation "On Joint Stock Companies" provides for the issuance by a company of one or several types of such securities. There are two main types of preferred shares: cumulative and convertible.
Dividends of cumulative preferred shares may not be paid in ordinary reporting periods by decision of the general meeting of shareholders if there is no profit or it is completely directed to the development of the company. The obligation to pay the lost income remains. Dividends are accumulated and paid after stabilization of the financial position of the joint stock company. The holder of the cumulative share acquires the right to vote at the meeting of shareholders for the period during which he did not receive dividends, and loses it after the payment of the delayed income.
Convertible preference shares can be exchanged by the owner for a certain period of time for ordinary shares or another type of preference shares. When such securities are issued, the exchange rate, proportionality and exchange period are determined.
