What You Need to Know About Noncumulative Preferred Stock
Definition & Meaning
Noncumulative preferred stock refers to a type of preferred stock where unpaid dividends do not accumulate over time. If a company decides to skip a dividend payment, shareholders of noncumulative preferred stock will not receive those missed payments in the future. This means that once a dividend is omitted, it is permanently lost to the shareholder. This stock is often sought by investors who prefer a more predictable income stream, but it carries the risk of missing out on dividends if the company faces financial difficulties.
Legal Use & context
Noncumulative preferred stock is commonly used in corporate finance and investment law. It is relevant in contexts such as:
- Corporate governance and shareholder rights
- Investment agreements and securities regulation
- Bankruptcy proceedings, where the priority of dividend payments may be assessed
Users can manage related forms and agreements through legal templates provided by services like US Legal Forms, which are drafted by experienced attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company issues noncumulative preferred stock with a 5 percent annual dividend. If the company skips the dividend payment in one year, shareholders will not receive that payment in the future, even if the company becomes profitable again.
Example 2: An investor holds noncumulative preferred shares in a startup. If the startup faces financial challenges and decides not to pay dividends for two consecutive years, the investor will not receive those payments later (hypothetical example).