What is Dividend Preference and Why It Matters for Investors

Q: Can a company suspend dividend payments to preferred shareholders?

Yes, if the company faces financial difficulties, it may suspend dividend payments.

Q: Do preferred shareholders have voting rights?

Typically, preferred shareholders do not have voting rights like common shareholders do.

Definition & Meaning

Dividend preference refers to the entitlement of preferred shareholders to receive dividends before any distributions are made to common shareholders. This means that if a company declares a dividend, preferred shareholders are prioritized in receiving their payments. This arrangement is often outlined in the company's articles of incorporation or bylaws, providing a level of financial security for preferred stockholders.

Table of content

Legal Use & context

Dividend preference is primarily relevant in corporate law and finance. It is often encountered in the context of corporate governance and shareholder rights. Preferred shares are typically issued by companies to raise capital while offering investors a fixed dividend. Understanding dividend preference is crucial for investors, company executives, and legal professionals involved in corporate finance and investment strategies. Users may find it helpful to utilize legal templates from US Legal Forms to draft agreements or documents related to preferred shares.

Key legal elements

Priority of payment: Preferred shareholders receive dividends before common shareholders.
Fixed dividend rate: The amount paid to preferred shareholders is usually predetermined.
Cumulative vs. non-cumulative: Cumulative preferred shares accumulate unpaid dividends, while non-cumulative shares do not.
Terms outlined in corporate documents: The specifics of dividend preference are detailed in the company's bylaws or articles of incorporation.

Real-world examples

Here are a couple of examples of abatement:

For instance, if a company earns a profit and decides to distribute $100,000 in dividends, and it has both preferred and common shares, preferred shareholders may receive their fixed dividend first, say $70,000. Only after this payment would the remaining $30,000 be available for common shareholders. (hypothetical example)

State-by-state differences

Examples of state differences (not exhaustive):

State	Dividend Preference Regulations
Delaware	Allows flexibility in defining dividend rights in corporate charters.
California	Requires disclosure of dividend preferences in corporate filings.
New York	Has specific rules about the issuance of preferred shares and their dividends.

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 Shares	Shares that provide dividends before common shares.	Includes dividend preference as a feature.
Common Shares	Shares that represent ownership in a company.	Dividends are paid after preferred shares.
Cumulative Preferred Shares	Preferred shares that accumulate unpaid dividends.	Dividend preference is guaranteed even if unpaid in previous periods.

Common misunderstandings

What to do if this term applies to you

If you are a preferred shareholder and have questions about your rights to dividends, consider reviewing your company's bylaws or articles of incorporation. For those looking to draft or modify shareholder agreements, US Legal Forms offers templates that can help streamline the process. If your situation is complex or involves disputes, consulting with a legal professional is advisable.

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Quick facts

Preferred shareholders receive dividends before common shareholders.
Dividend preference is outlined in corporate documents.
Dividends can be cumulative or non-cumulative.
State regulations may vary regarding preferred shares.

Key takeaways

Frequently asked questions

What is the difference between preferred and common shares?

Preferred shares have priority for dividend payments, while common shares do not.