Is it possible to convert preferred shares into bonds? Stock. Conversion of Alrosa shares
A share is an issuance security that secures the rights of its owner (shareholder) to receive part of the JSC's profit in the form of dividends, to participate in the management of the JSC and to part of the property remaining after its liquidation (Article 2 of the Federal Law of April 22, 1996 N 39-FZ " About the market valuable papers»).
Distinguish between ordinary and preferred shares, distributed by open or closed subscription. The owners of ordinary shares of the company can participate in the general meeting of shareholders (hereinafter referred to as the GMS), have the right to vote on all issues of its competence and the right to receive dividends, and in the event of liquidation of the joint-stock company they have the right to receive part of the property (Article 31 of the Federal Law of December 26, 1995 year N 208-FZ). Each ordinary share gives its owner the same amount of rights and is not convertible into preference shares and other securities.
JSCs may issue several types of preference shares, and the charter of the company must determine the amount of the dividend and/or the value paid upon liquidation of the company (liquidation value) on preference shares of each type. The order of payment of dividends and the liquidation value of each type of preferred shares are determined.
There are cumulative and convertible shares. On preferred cumulative shares, the unpaid or not fully paid dividend is accumulated and paid no later than the period specified by the charter of the JSC.
The charter of the company may provide for the conversion of preferred shares certain type into ordinary shares or preferred shares of other types at the request of shareholders - their owners or the conversion of all shares of this type within the period specified by the charter of the company. The conversion of preference shares into bonds and other securities, with the exception of shares, is not allowed. The conversion of preference shares into ordinary shares and preference shares of other types is allowed only if it is provided for by the charter of the company, as well as during the reorganization of the company.
Shareholders - owners of preference shares of a certain type, the amount of dividend for which is determined in the company's charter, with the exception of shareholders - owners of preference cumulative shares, have the right to participate in the GMS with the right to vote on all issues of its competence, starting from the meeting following the annual GMS, at in which, regardless of the reasons, a decision was not made to pay dividends or a decision was made to pay incomplete dividends on preferred shares of this type. The right of shareholders - owners of preference shares of this type to participate in the GMS shall terminate from the moment of the first payment of dividends on the said shares in full.
Shareholders - owners of cumulative preference shares of a certain type have the right to participate in the GMS with the right to vote on all issues within its competence, starting from the meeting following the annual GMS, at which a decision was to be made on the payment of these shares in full amount of accumulated dividends, if such a decision was not made or a decision was made to pay incomplete dividends. The right of shareholders - owners of cumulative preference shares of a certain type to participate in the GMS shall terminate from the moment of payment of all dividends accumulated on the specified shares in full.
Often, organizations in the course of their financial and economic activities invest free cash in securities (including shares) of other enterprises. This type of investment refers to financial investments (clause 3 of the Accounting Regulation “Accounting financial investments» PBU 19/02, approved by Order Ministry of Finance of the Russian Federation dated December 10, 2003 N 126n).
Types of services from AAA-Investments LLC
- Registration of companies (PJSC/JSC)
- Registration of changes
- Changes in the Criminal Code
- Changes in the types of activities of the company (OKVED)
- Bringing the charter of a CJSC into line with Federal Law No. 312-FZ
- Change of name, legal address
- Liquidation and reorganization
- Other services
- Entry into the register of small businesses in Moscow
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Buying stocks always poses a risk of losing money, but avoiding stocks altogether means there is no way to make a good profit. However, there is one security that can help solve this dilemma for some investors: convertible preferred shares provide the assurance of a fixed rate of return plus the opportunity for capital appreciation. Here we look at what these securities are, how they work, and how to determine when a conversion is profitable.
What are convertible preferred shares
These shares are fixed income corporate securities that an investor can choose to turn into a certain number of shares of the company's common stock after a given period of time or on a specific date. The fixed income component provides a steady income stream and some investor capital protection. However, the possibility of converting these securities into shares allows the investor to benefit from the growth in the share price.
Convertibles are especially attractive to those investors who want to participate in the growth of companies with high growth rates, insulated from a price decline if the stock does not perform well.
Opportunities for the investor
To demonstrate how convertible preferred shares work and how shares benefit investors, let's look at an example. Let's say Acme Semiconductor issues 1 million convertible preferred shares at $100 per share. These convertible preferred shares (because they are fixed income securities) give holders priority over ordinary shareholders in two ways. First, convertible preferred shareholders receive a 4.5% dividend (assuming Acme's earnings remain sufficient) before any dividends are paid to ordinary shareholders. Second, convertible preferred shareholders will be ahead of ordinary shareholders in returning capital if Acme ever goes bankrupt and its assets are to be sold off. At the same time, convertible preferred shareholders, unlike ordinary shareholders, rarely have the right to vote.
By buying Acme Preferred Stock with Convertible Preferred Stock, the worst investors will ever receive a $4.50 annual dividend for every share they own. But these securities offer holders the opportunity for even higher returns: if convertible preferred shareholders see Acme stock rise, they may have the opportunity to profit from that rise by turning their fixed-income investments into equity. On the date of the reset, Acme convertible preferred stock shareholders have the option to convert some or all of their preferred stock into common stock.
Determining Conversion Profit
The conversion rate is the number of shares of common stock that shareholders can receive for each convertible preferred share. The conversion rate is set by management prior to issuance, usually with management investment bank. For Acme, let's say the conversion rate is 6.5, which allows investors to trade preferred stock for 6.5 Acme shares.
The conversion rate indicates what price the common stock needs to trade in order for the preferred stock shareholder to earn on the conversion. This price, known as the conversion price, is equal to the purchase price of the preferred share divided by the conversion rate. So for Acme, the market conversion price is $15.38 ($100/6.5).
In other words, Acme common stock should be trading above $15. 38 for investors to gain from the conversion. If the stock converts and goes below $15. 38, investors will suffer a loss of capital on their investment of $100 per share. If the common stock ends at $10, for example, then the convertible preferred shareholders will only receive $65 ($10) of common stock in exchange for their $100 preferred stock. ($100 is the parity value of the preferred shares.)
Conversion premium
Convertible preferred shares can be traded for secondary market, and the market price and behavior are determined by the conversion premium, the difference between the parity value and the value of the preferred shares if the shares were converted. As shown above, the value of a converted preferred share is equal to the market price of common shares multiplied by the conversion factor. Let's say Acme's shares are currently trading at $12, meaning the preferred shares are worth $78 (12 x 65). As you can see, this is well below the parity value. So, if Acme shares are trading at $12, the conversion premium is 22% [($100 - $78) / 100].
The lower the premium, the more likely the market price of the conversion will match the total value of the shares up and down. Higher grade convertibles act more like bonds, as there is less chance of a profitable conversion. It means that interest rates can also affect the value of convertible preferred shares: for example, the price of bonds, the price of convertible preferred shares usually decreases as interest rates rise: a fixed dividend looks less attractive than rising interest rates. Conversely, as rates fall, convertible preferred shares become more attractive.
The bottom line
Converts calls to investors who want to participate in stock market without feeling like they're taking wild risks. Trading securities like shares when the price of common shares moves above the conversion price. If the share price falls below the conversion price, the convertible trades exactly like a bond, effectively placing a price floor under the investment.
Registering authorities in their practice of registration of issues of securities often encounter misunderstandings, and therefore errors in the preparation of documents for registration of issues related to the conversion of preferred shares into ordinary shares. In this article, we will discuss the requirements, including new ones, of the Law “On Joint Stock Companies”. Let us determine the sequence of the issuer's actions related to such a complex corporate action.
In accordance with paragraph 3 of Article 32 of the Law "On Joint Stock Companies" (as amended by the Federal Law of 07.08.2001 No. 120-FZ): - "the company's charter may provide for the conversion of preferred shares of a certain type into ordinary shares or preferred shares of other types at the request of shareholders - their owners or the conversion of all shares of this type within the period specified by the charter of the company. In this case, the charter of the company at the time of the adoption of the decision, which is the basis for the placement of convertible preferred shares, must determine the procedure for their conversion, including the number, category (type) of shares into which they are converted, and other conditions for conversion. It is not allowed to change the said provisions of the company's charter after the adoption of a decision that is the basis for the placement of convertible preferred shares.
In accordance with the provisions of paragraph 1 of Article 37 of the Law "On Joint-Stock Companies": - "the procedure for converting equity securities of a company into shares is established:
the charter of the company - in relation to the conversion of preferred shares;
decision on issue - in relation to the conversion of bonds and other, with the exception of shares, issue-grade securities.
The placement of the company's shares within the limits of the number of authorized shares required for the conversion of the company's placed convertible shares and other issuance securities of the company into them shall be carried out only through such conversion.
In accordance with the foregoing, the joint-stock company has the right to convert preferred shares into ordinary shares. At the same time, the general meeting of shareholders must make decisions on introducing amendments and additions to the charter of the company.
First, about the possibility of converting preferred shares into ordinary shares with one of the following conditions:
or at the request of all or individual holders of preferred shares;
or conversion of all preference shares into ordinary shares within the period specified by the company's charter.
Such a decision of the general meeting is recognized as a decision on the placement of preferred convertible shares. Thus, there is no need to make a separate decision on such placement. It should be recalled that in accordance with paragraph 4 of Article 32 of the Law "On Joint Stock Companies", the owners of preferred shares acquire the right to vote when deciding at the general meeting of shareholders the issue of amending and supplementing the company's charter in terms of supplementing the rights to preferred shares. Such a "right" can be recognized as the conversion of preferred shares into ordinary shares only if such conversion is carried out without the consent of the owners of such preferred shares upon the occurrence of the period established by the charter of the company.
Secondly, the procedure for converting preferred shares into ordinary and other terms of conversion (for example, the terms of conversion, or the procedure and terms for accepting and satisfying applications from shareholders demanding conversion) should be determined.
AT new edition The Law “On Joint Stock Companies” distinguishes between conversion at the request of shareholders - owners of convertible preferred shares and conversion upon the maturity of the period stipulated by the charter of the company. Moreover, only conversion on demand can be called directly “right”, since only in this case the shareholder - the owner of the convertible preferred share is given the right to choose: to carry out the conversion and present the appropriate demand to the company or not to carry out the conversion and not make such a demand. At the same time, a situation is possible when some shareholders make such a requirement, and some shareholders do not. As a result, only part of the shares will be converted into ordinary shares, and the remaining part will either remain preferred convertible, or the conversion request will come later, after the expiration of the period for placing ordinary shares. Attention should be paid to the timing of the placement of ordinary shares. In accordance with the requirements of clause 5.3 of the Standards approved by Resolution No. 16/ps of the Federal Securities Commission of Russia dated April 30, 2002, if the decision on the placement of convertible securities provides that the conversion is carried out at the request of their owners, it must establish a period within during which the owners can submit the relevant applications, as well as the period during which, on the basis of such applications, the conversion must be carried out. In addition, in accordance with paragraph 10.1 of the Issue Standards, the placement of securities by conversion in the cases provided for by subparagraph "a" of paragraph 5.1 of the Standards (in our case, the placement of ordinary shares by converting preferred convertible shares into them) is carried out within the period established in the registered decision on their issue, which must correspond to the period established in the decision on the issue of securities convertible into them and may not exceed one year from the date of approval of the decision on the issue of securities placed by conversion. Thus, if not all shareholders have filed a conversion request within the period specified in the registered issuance decision, the company will have to make a new decision on the placement of ordinary shares in order to exercise the right to convert the remaining holders of preferred convertible shares
In the event that the conversion is carried out upon the expiration of the period stipulated by the company's charter, all preferred shares of the corresponding type are converted, regardless of the desire of their owners. In other words, in this case, the shareholder - the owner of the convertible preferred share cannot refuse the "right to convert" otherwise than by ceding (selling) the ownership rights to the convertible preferred share. In accordance with paragraph 10.1 of the Issue Standards, the placement of securities by converting securities into them, the decision to issue which provides for their conversion at maturity, is carried out on the day determined by the calendar date, or on the expiration date of the period determined by the period of time, according to register of holders of convertible securities on that date. In the latter case, the time limit must be reasonable. After all, the implementation of such a conversion is possible as a result of state registration two issues and one report on the results of the issue (issue of preferred convertible shares, report on the results of their placement and issue of ordinary shares). When establishing such a period in the company's charter, one should take into account the time required by the issuer's executive body to prepare packages of documents for registration of issues; the time required by the authorized body of the issuer to approve such documents; the time required by the registering authority to review the submitted documents and make a decision on state registration of issues and reports or on refusal. The following wording in the Articles of Association seems to be justified: - “conversion of preferred convertible shares into ordinary shares is carried out on the 25th day after the state registration of the issue of ordinary shares”.
Thirdly, the number of announced ordinary shares should be determined, not less than the number of outstanding preferred shares. Note that if there are securities convertible into shares of the company in circulation, the number of declared shares required for such a conversion cannot be placed in any other way than by such a conversion. This means that if the company intends to increase its charter capital, for example, by placing additional shares by subscription, such an increase can only be carried out to the extent of the number of authorized shares exceeding the number of authorized shares required to convert all circulating securities of the company convertible into shares. In our case, if there are 100 preferred convertible shares in circulation that can be converted into 100 ordinary shares of this company, then declared ordinary shares can be used only in excess of the specified number to place another additional issue of ordinary shares (subscription or distribution among shareholders). If the company's charter provides for only 100 announced ordinary shares, then the company must adopt amendments to the charter related to an increase in the number of authorized shares.
It should be recalled that in accordance with the requirements of clause 5.2 of the Emissions Standards, nominal cost preference shares, which are converted first into preference convertible shares and then into ordinary shares, must be equal to the par value of the outstanding ordinary shares. Otherwise, the company must first carry out an additional issue related to bringing the nominal values of preferred and ordinary shares into line (split, consolidation, increase or decrease in the nominal value). However, we must not forget about the requirement of paragraph 2 of Art. 25 of the Law "On JSC": the nominal value of the placed preferred shares must not exceed 25 percent of authorized capital society.
Registration of issues of securities and placement consists of several stages.
1. Registration and placement of preferred convertible shares.
In accordance with subparagraph "d" of paragraph 5.1 of the Issue Standards, this method of placement is called "conversion into preferred shares with other rights of preferred shares of the same type, the decision to change and (or) supplement the rights for which is made by the joint-stock company." In the Issuer's Electronic Questionnaire, you should select the method - "conversion of preferred shares of a certain type into preferred shares with other rights of the same type." In accordance with paragraph 10.1 of the Standards, the conversion of preferred shares into preferred convertible shares must be carried out no later than one month from the date of state registration of the share issue, on the same day specified in the registered decision on their issue.
2. Registration of a report on the results of the issue of preferred convertible shares.
3. Registration and placement of ordinary shares by converting preferred convertible shares into them.
In accordance with subparagraph "a" of paragraph 5.1 of the Issue Standards, this method of placement is called - "conversion into shares of preferred shares or bonds convertible into shares." In the Issuer's Electronic Questionnaire, you should select the method - "conversion of preferred convertible shares of a certain type into ordinary shares."
4. Registration of a report on the results of the issue of ordinary shares.
5. Amending the charter of the company to increase the number of ordinary shares and reduce preferred convertible shares and a corresponding decrease in declared ordinary shares.
The authorized body of the issuer (Board of Directors, general meeting of shareholders) may approve the decision on the issue of preferred convertible shares and the decision on the issue of ordinary shares at one of its meetings. However, it must be kept in mind that, in accordance with the requirements of the Issue Standards, the decision to issue securities must be approved no later than six months from the date of the decision to place them (clause 6.3). Documents for the state registration of the issue of securities must be submitted no later than three months from the date of approval of the decision on their issue (clause 9.8).
Documents for state registration and the first and second issues are provided in full compliance with the requirements of the Emission Standards for completeness (Chapter VIII of the Standards).
Issuers often make mistakes when preparing a decision to issue preferred convertible shares. Attention should be paid to clause 6.2 of Appendix 4 to the Emission Standards. For convertible securities, the category (type) of shares, the series of bonds, the nominal value of the securities into which they are converted, the number of shares (bonds) into which each convertible share (bond) is converted, all rights granted by the securities into which they are are converted, as well as the procedure and conditions for such conversion; other rights provided by law Russian Federation. In our case, the decision on the issue should contain information about the rights (as they are reflected in the charter of the company) provided by the shares into which the conversion takes place, i.e. ordinary shares, their par value and number.
In accordance with paragraph 6.1 of Appendix 4 to the Issue Standards, for shares, the exact provisions of the issuer's charter on the rights granted by shares of this category (type) (including the amount of dividend on preferred shares) are indicated, other rights of their owners provided for by the legislation of the Russian Federation are described . In our case, the exact provisions of the issuer's charter on the rights granted by preferred convertible shares are indicated, including the procedure, conditions and terms for their conversion into ordinary shares.
The sequence of actions of the issuer (scheme).
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1. The Board of Directors of the JSC approves the agenda general meeting shareholders. Notifies shareholders of the place and time of the general meeting of shareholders. |
The preparation of the general meeting is carried out in accordance with the requirements of Art. 54 of the Law "On Joint Stock Companies" |
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2. The general meeting decides to amend the charter on the possibility of converting preference shares into ordinary shares and on declared ordinary shares. |
Such a decision of the general meeting is recognized as a decision on the placement of preferred convertible shares |
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3. Preparation of documents for state registration of the issue of preferred convertible shares. |
The decision to issue securities must be approved no later than six months from the date of the decision to place them (clause 6.3 of the Standards). Documents for the state registration of the issue of securities must be submitted no later than three months from the date of approval of the decision on their issue (clause 9.8 of the Standards) |
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4. Placement (conversion) after state registration of the issue. Carrying out relevant operations in the registry system. |
The conversion of preferred shares into preferred convertible shares must be carried out within a period not later than one month from the date of state registration of the issue of shares, on the same day specified in the registered decision on their issue (clause 10.1 of the Standards). For example, on the 10th day from the date of state registration of the issue. |
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5. Preparation of documents for state registration of the report on the results of the issue of preferred convertible shares. Approval of the report on the results of the issue and submission of documents to the registration authority. |
The issuer submits to the registering authority a report on the results of the issue of shares placed through conversion - no later than 30 days from the date of conversion. (clause 11.3 of the Standards). |
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6. The General Meeting decides on the placement of ordinary shares by converting preferred convertible shares into them. |
Such a decision may be taken at the same general meeting at which a decision is made to amend the articles of association. (see paragraph 2 of this table) |
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7. Preparation of documents for state registration of the issue of ordinary shares. Approval of the decision on the issue by the Board of Directors. Submission of documents to the registration authority. |
The decision to issue securities must be approved no later than six months from the date of the decision on their placement (clause 6.3 of the Standards). Documents for the state registration of the issue of securities must be submitted no later than three months from the date of approval of the decision on their issue (clause 9.8 of the Standards). |
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8. Placement (conversion) after state registration of the issue. Carrying out relevant operations in the registry system. |
The placement of securities by conversion in the case provided for by subparagraph "a" of paragraph 5.1 of the Standards is carried out within the period established in the registered decision on their issue, which must correspond to the period established in the decision on the issue of securities convertible into them and cannot exceed one year from the date of approval of the decision to issue securities placed through conversion. (clause 10.1 of the Standards) |
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9. Preparation of documents for state registration of the report on the results of the issue of ordinary shares. Approval of the report on the results of the issue. Submission of documents to the registration authority. |
The issuer submits to the registering authority a report on the results of the issue of securities placed by conversion no later than 30 days from the date of conversion, if the conversion is carried out at a time, or no later than 30 days from the expiration date of the conversion period, if the conversion is not carried out at a time. (clause 11.2 of the Standards). |
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10. Introducing amendments to the company's charter related to an increase in the number of ordinary shares, a decrease in the number of preferred shares and authorized shares. |
Amendments and additions to the charter of the company based on the results of the placement of the company's shares are made on the basis of a decision of the general meeting of shareholders to increase the authorized capital of the company or a decision of the board of directors (supervisory board) of the company, another decision that is the basis for the placement of shares and equity securities convertible into shares, and a registered report on the results of the issue of shares. Art. 12 of the Law "On JSC" |
And what to choose for several years ahead
Some companies issue two types of shares: common and preferred. The difference between them seems simple: in the first case, you are guaranteed the right to vote at the shareholders' meeting and are not guaranteed the payment of dividends, in the second, the opposite is true.
But not everything is so simple. The Law "On Joint Stock Companies" describes all possible situations where preference shares differ from ordinary ones. These differences can be divided into 3 groups: non-payment of dividends, voting at the shareholders' meeting and liquidation of the company. Let's talk about them and see what type of securities is more profitable to buy for several years.
Difference 1.Non-payment of dividends
Dividends are a share of a company's income divided by the number of shares. According to Article 42 of the Law "On Joint Stock Companies", the company pays dividends from net profit and special funds. Net profit is the income left after the payment of salaries, taxes, debts. And special funds are created for the payment of dividends when the company has too much money.
The amount of dividends is specified in the company's charter. This can be either an exact amount or a formula for calculating net income.
If the charter does not specify how much the owner of preferred shares will receive, then the amount of payments for these and ordinary shares is the same and it is approved by the board of directors, and the owners of ordinary shares accept it. And the size of dividends cannot be higher than the value agreed by the board of directors.
But it happens that the owners of preferred shares are not paid dividends: there is no profit, there are no special funds for payment. In case of non-payment, you will have the right to vote on all matters of the company. But other options are possible, you need to look at the charter of the company. The law allows converting shares into cumulative and converted.
Cumulative shares accumulate dividend debt for a certain period specified in the charter. In case of delay, your shares will receive voting rights. Convertible - give the right to vote until the company pays dividend debt.
Excerpt from the charter of Rosseti. Preferred shareholders receive voting rights if they do not receive dividends
That is, in case of non-payment of dividends, the company can choose from several alternatives. Of course, you can find out about all the conditions in advance. Dividend policy is described in the articles of association joint-stock company. On the site, it is usually published in the section "Investors and Shareholders".
Difference 2.Voting at the meeting
Most issues are voted on by ordinary shareholders only. The principle is simple: one share, one vote. For example, at the end of June 2018, Aeroflot shareholders voted on the approval of annual profits, payment of remuneration to members of the board of directors, as well as on the approval of upcoming major transactions.
The scope of the rights of holders of ordinary shares varies depending on the number of shares. However, let us disappoint those who plan to gain control in large companies: in most of them significant blocks of shares were purchased by the state.
| How many shares are there |
What can |
|---|---|
| 1 % | View the list of other shareholders. File a lawsuit against the CEO or a member of the Board of Directors with a claim for compensation for losses caused to the company |
| 2 % | Propose candidates to the SD. Make proposals to the agenda of the annual meeting of shareholders |
| 10 % | Call an extraordinary meeting of shareholders, even if it is rejected by the board of directors |
| 25 % + 1 share |
Block board decisions |
| 50 % + 1 shares |
You can independently decide on most issues that do not require a 75% yes vote |
| 75 % + 1 share |
You can make any decisions on the management of the company |
There are several topics that cannot be discussed without preferred shareholders. This is everything that is connected with the liquidation of the company, reorganization, change in the charter, placement of new shares on the stock exchange or withdrawal of existing ones from circulation.
Difference 3.Liquidation of company
The third difference is the simplest. If you own preferred shares, you will receive your share earlier in the event of bankruptcy. The shares will be redeemed and you will be paid the salvage value for them.
The same applies to dividends. Liquidation dividends are first paid on preferred shares. And only then the remainder is divided among the owners of ordinary shares.
What stocks to buy
If you do not plan to influence the activities of the company and need a stable income from dividends, choose preferred shares. Their payouts are more stable and predictable. And the securities themselves are cheaper than ordinary shares and grow stronger. When buying for several years - the best option.
Short
- Shares are divided into 2 types: ordinary and preferred.
- Ordinary shares are allowed to vote at the meeting of shareholders, preferred ones give fixed dividends.
- If no dividends are paid, the preferred shares will give voting rights.
- If it is necessary to amend the articles of association or it is a question of reorganization or liquidation of the company, all types of shares vote.
- If there are a lot of ordinary shares, the investor receives bonus rights and opportunities.
- If you need a more stable income, preferred shares are more profitable than ordinary ones. But only if you buy them for several years.
Preference shares- this is a special kind 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 in the world.
It allows the owner to receive a guaranteed income based on the dividend rates offered by the issuer of securities.
Also, in some cases, the holder of such shares can influence the company's development strategy.
Benefits of Preferred Shares
Preferred shares have a number of advantages for the investor when compared to ordinary securities.
First, almost always the owner of preferred shares is guaranteed some income.
Namely, preference shares accrue a fixed income, in contrast to ordinary shares, which depend on the profits of a 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 a 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 amount of net income.
In addition, these shareholders may have additional rights specified in the statutory documents of the company.
For example, they may, under certain conditions, convert their preferred shares into .
Disadvantages of Preferred Stock
There are also disadvantages of owning preferred shares:
The issuing company may demand back the shares from the shareholder without giving reasons, while fully compensating the damage with interest;
Preference shares often do not carry voting rights. That is, the holders of privileged rights are deprived of the right to vote and, thus, are deprived of the opportunity to participate in the management process of a joint-stock company and make important decisions for the company;
Fixed dividend. 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 yield of these securities.
How are preferred shares different from ordinary shares?
The very name "preferred" shares indicates that such shares give additional features 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 profit or loss.
Also, unlike ordinary shares, preferred shares give the right to receive a share of the company's property 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 inactive 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 firm. In this case, the charter of the JSC provides for the ratio of votes of the owners of ordinary and preferred shares, for example, 1:2. So, it turns out that the owner of one share with a privilege has two votes.
Certain cases provide for the right to influence the affairs of the firm and participate in meetings to those owners who cannot vote.
Such cases are also provided by law to protect the interests of the owners. Thus, the owners of all shares issued by the company can influence decisions related to the liquidation or reorganization of the company.
There are also issues related to shareholders that cannot be resolved without their participation. For example, when reducing guaranteed dividends.
If the JSC is not able to pay guaranteed dividends, then the preferred shareholder receives the full right to participate in the meetings of the company on all issues.
It is also worth noting that preference shares can be convertible and cumulative.
Rights of holders of preferred shares
Holders of preferred securities, along with the main shareholders, receive a share in the authorized capital of the company, have the right to attend general meetings.
Despite the fact that the holder of such securities does not have the right to vote, he can participate in meetings of shareholders, claim a share of the property during the liquidation of the organization.
Eligibility to vote
In general, holders of preferred shares are not allowed to vote.
An exception may be cases where the decisions taken at the relevant negotiations affect the personal interests of the holders of securities.
In particular, if there are special items on the agenda of the meeting important questions, preferred asset holders can vote. These may be issues reflecting the procedure for a possible reorganization of a company or liquidation of a company, those related to making adjustments to the charter, which are related to the rights of holders of preferred shares, or, for example, to the payment of dividends.
Types of preferred shares
Preferred shares are divided into classes with different scope 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 preference shares may not be paid on 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.
At the same time, the obligation to pay lost income remains.
Dividends are accumulated and paid out after stabilization of the financial position of the joint-stock company.
That is, a feature of cumulative preferred shares is the accumulation of dividends. Holders of cumulative preference shares have the right to accumulate unpaid dividends, accrue them and pay them out in the next 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 the meeting of shareholders for the period during which he did not receive dividends, and loses it after the payment of dividends.
Convertible preferred shares may be exchanged by the owner of the shares within a specified period for ordinary shares or other types of preferred shares.
When issuing such securities, the rate, proportionality and exchange period are determined.
There are also the following types preferred shares:
non-cumulative, for which unpaid dividends are not added to the dividends of the next years;
unconverted, which cannot change their status;
with participation interests that entitle the holders of these shares to receive additional dividends in excess of the stipulated dividends.
Results
The advantages of preferred shares consist in the shareholder's right to:
receive a fixed income or income as a percentage of the value of shares, or a certain amount Money, which is paid regardless of the performance of the joint-stock company;
to receive dividends in the first place;
for preferential participation after satisfaction of 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 investment, then the way to purchase preferred shares is the most appropriate.
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Preferred shares: details for an accountant
- Justification of income in terms of financial and economic activities
2000 ordinary shares and 800 preferred shares. According to forecasts of the joint-stock company, for ... pcs. par value of 1 thousand rubles, preferred shares - 500 thousand pieces. face value 1 ... thousand rubles. Dividends on preferred shares are 8% of the par value of the shares... let's calculate the annual amount of dividends on preferred shares: Income plan 2019 (2020, 2021 ...
- Key indicators of the economic power of the enterprise and the level of efficiency of its owner and management team
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