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What is Deferred Stock? A Comprehensive Legal Overview
Definition & Meaning
Deferred stock refers to shares that grant holders the right to receive dividends only after a specific date or upon the achievement of certain conditions, such as the company reaching defined profitability targets. This type of stock is often issued to company founders and key management personnel, limiting their access to dividends until all other shareholders, including preferred and common stockholders, have received their distributions. In the event of bankruptcy, holders of deferred stock have no claim to the corporation's assets until all preferred and common stockholders have been compensated.
Table of content
Legal Use & context
Deferred stock is primarily relevant in corporate law and finance. It is often used in the context of employee compensation, particularly for executives and founders, to align their interests with those of other shareholders. Legal professionals may encounter deferred stock in various transactions, including mergers, acquisitions, and corporate restructuring. Users can manage related documentation through legal templates provided by services like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A tech startup issues deferred stock to its founders, allowing them to receive dividends only after the company achieves $1 million in profit. Until that milestone is reached, the founders cannot access any dividend payments.
Example 2: A corporation faces bankruptcy. The holders of deferred stock must wait for all preferred and common stockholders to be paid before they can claim any assets from the liquidation process. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Difference
California
Deferred stock may have specific tax implications for founders.
Delaware
Commonly used in corporate bylaws to define shareholder rights.
New York
Regulations may affect how deferred stock is treated in bankruptcy.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Preferred Stock
Shares that typically provide dividends before common stock.
Preferred stockholders usually have priority in asset claims.
Common Stock
Shares that represent ownership in a company, with voting rights.
Common stockholders receive dividends after preferred stockholders.
Restricted Stock
Shares that have limitations on transferability and sale.
Restricted stock may not have deferred dividend rights.
Common misunderstandings
What to do if this term applies to you
If you hold deferred stock or are considering it as part of your compensation package, it is essential to understand the terms and conditions associated with it. Review your company's stock agreements carefully. For assistance, you can explore US Legal Forms for templates that can help you manage your stock agreements. If you have complex questions or concerns, consulting a legal professional is advisable.
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The primary benefit is that it aligns the interests of management with those of other shareholders by delaying dividend payments until certain performance metrics are achieved.
Voting rights depend on the specific terms of the stock. Often, deferred stock does not carry voting rights like common stock does.
In a merger, the treatment of deferred stock will depend on the terms of the merger agreement and the specific rights attached to the stock.