Understanding Participating Preferred Stock: A Comprehensive Guide
Definition & meaning
Participating preferred stock is a type of equity security that provides shareholders with a fixed dividend, which is paid out before any dividends are distributed to common stockholders. In addition to this fixed dividend, participating preferred shareholders may also receive extra dividends if the dividends paid to common shareholders exceed a predetermined amount. This type of stock can also grant shareholders the right to receive their initial investment back, along with a portion of any remaining proceeds, in the event of liquidation.
Legal use & context
Participating preferred stock is commonly used in corporate finance and investment contexts. It is relevant in various legal practices, including corporate law and securities regulation. This type of stock is often included in investment agreements and can impact the rights of shareholders during financial events like mergers or liquidations. Users may manage related documents using legal templates available through platforms like US Legal Forms, which provide resources drafted by qualified attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company issues participating preferred stock with a fixed dividend of five percent. If common shareholders receive dividends of seven percent, the preferred shareholders would also receive an additional two percent, allowing them to benefit from the company's success.
Example 2: In a hypothetical scenario, if a company goes bankrupt, participating preferred shareholders may first recover their original investment and then share in any remaining assets after common shareholders are paid.