Like non-convertible, straight preferred stock, non-convertible, double-dip participating preferred stock has a fixed, accruing dividend and a senior liquidation preference pursuant to which the preferred shareholder receives back its invested money plus all accumulated, unpaid dividends before the common shareholders get paid. But, unlike non-convertible, straight preferred stock, it also participates with the common stock up to a stated fixed percentage of the sales proceeds in excess of the senior liquidation preference upon a sale of the company; for example, the preferred shareholders may receive 10% of any remaining sale proceeds.
This feature is known as a “double-dip” participation because the preferred shareholder receives both its senior liquidation preference and a percentage of the remaining sale proceeds. Note, however, that this type of preferred stock cannot be converted into common stock.
This type of preferred stock is attractive to investors because it provides them with a preferred return, but also allows them to participate in any remaining proceeds of a sale of the company through the double-dip feature. It often is used in a buyout involving a rollover of common stock by the target company’s management or shareholders. The participation feature helps facilitate a tax-free rollover, deferring tax on any gain on the stock rolled over in the acquisition.
This post was written by Matthew D’Ascenzo.