I drafted a series of posts last year entitled “Preferred Stock Demystified” regarding the payments rights and preferences attendant upon various classes of preferred stock.
I now will supplement that series by posting a series of blogs regarding common features of preferred stock including:
- Put and Call Rights;
- Conversion Rights;
- Pre-emptive Rights; and
- Governance and Information Rights.
These features protect investors’ interests in ways that I will discuss in the individual blog posts. These posts provide a brief overview of certain common features of preferred stock. If you are considering raising capital, you should discuss with legal counsel whether any of these features of preferred stock are appropriate for your capital raise.
- Put and Call Rights. Put rights – sometimes called mandatory redemption rights – allow investors to cash out their investment, assuring them that they will be able to receive a return on their investment. Put rights typically allow the investors to sell shares back to the company at a predetermined time, such as five (5) years after their investment, or upon the occurrence of a predetermined event, such as a sale or dissolution of the company. The mandatory redemption price may be at a fixed or floating redemption price per share (such as a multiple of EBITDA or some other financial performance metric) and may include payment of accrued and unpaid dividends. Note, however, that the company’s payment to investors exercising their put rights may be delayed if the company does not have sufficient funds.
- Call rights – sometimes called optional redemption rights – permit the company to call investors’ preferred shares. Call rights may be used to reduce the company’s exposure for future preferred dividend payments if the company has enough money to buy out the preferred stock. The redemption price may be a percentage of the liquidation value of the shares which decreases over a period of time after the date of issuance (often three (3) to five (5) years).
This post was written by Matthew D’Ascenzo