Participating Preferred Stock
What Is Participating Preferred Stock?
Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equivalent to the usually indicated rate that preferred dividends are paid to preferred shareholders, as well as an extra dividend in view of some foreordained condition. Participating preferred stock can likewise have liquidation inclinations upon a liquidation event.
Participating Preferred Stock
Participating preferred stock — like different forms of preferred stock — outweighs everything else in a company's capital structure over common stock however positions below debt in liquidation events. The extra dividend paid to [preferred shareholders](/inclination shares) is commonly structured to be paid provided that the amount of dividends that common shareholders receive surpasses a predetermined per-share amount.
Moreover, in the event of liquidation, participating preferred shareholders can likewise reserve the option to receive the stock's purchasing price back along with a pro-rata share of any leftover proceeds that the common shareholders receive.
At the point when there is a liquidation event, whether an investor's preferred stock is participating or nonparticipating will decide whether that investor receives extra consideration over the liquidation value of the preferred stock and any dividends owed to the investor. In the event that an investor's preferred stock is participating, that investor is qualified for any value extra post-liquidation as though that stock had been common stock. Nonparticipating preferred shareholders, then again, receive their liquidation value and any dividends financially past due if applicable, however they are not qualified for some other consideration.
Participating preferred stock is rarely issued, however one manner by which it is utilized is as a poison pill. In this case, current shareholders are issued stock that gives them the right to new common shares at a bargain price in the event of an undesirable takeover bid.
Instance of Participating Preferred Stock
Assume Company An issues participating preferred shares with a dividend rate of $1 per share. The preferred shares likewise carry a clause on extra dividends for participating preferred stock, which is set off at whatever point the dividend for common shares surpasses that of the preferred shares. Assuming during its current quarter, Company A reports that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) too.
Presently think about a liquidation event. Company A has $10 million of preferred participating stock outstanding, addressing 20% of the company's capital structure with the other 80%, or $40 million, comprised of common stock. Company A sells, and the proceeds are $60 million. The participating preferred shareholders would receive $10 million yet additionally would be qualified for 20% of the leftover proceeds, $10 million in this case (20% x $60 million - $10 million). Nonparticipating preferred shareholders wouldn't receive extra consideration.
Features
- The extra dividend guarantees that these shareholders receive an equivalent dividend as common shareholders.
- Participating preferred stock is much the same as preferred shares that pay both preferred dividends plus an extra dividend to their shareholders.
- Participating preferred stock isn't common yet can be issued in response to a hostile takeover bid as part of a poison pill strategy.
