preferred stock

Corporate Finance/SecuritiesLegal glossary term

Legal Definition

Preferred stock is a class of shares in a corporation that grants the holder specific rights, such as the right to receive certain distributions or voting rights, which are superior to those of common stock. It typically represents ownership interests that are senior to common stock, often providing preferential economic benefits for the holders.

Plain-English Translation

Imagine a special type of share in a company's ownership. Instead of just being a regular share, this share gives you extra rights or privileges, like getting paid first when the company makes money, or having a say in important decisions. It’s a special kind of ownership that is more valuable than the basic shares.

Context in Contracts

It matters in legal documents because it defines the hierarchy of ownership within a corporate structure. It determines who gets paid first, who votes on major decisions, and the priority of claims against the company's assets.

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A corporation issuing preferred shares to secure debt financing.

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A shareholder claiming preferential rights under a preferred stock agreement.

Document context

How preferred stock shows up in legal documents

What is it?

Preferred stock refers to a class of shares issued by a corporation that holds specific rights, such as preferential voting rights or the right to receive certain distributions, which are senior to those of common stock.

Why does it matter?

It matters in legal documents because it defines the hierarchy of ownership within a corporate structure. It determines who gets paid first, who votes on major decisions, and the priority of claims against the company's assets.

When does it matter?

It usually appears when discussing corporate financing, securities offerings, or shareholder agreements where different classes of stock are being defined to show relative seniority.

Where is it usually seen?

It is usually seen in corporate law documents, securities regulations, and shareholder agreements related to the issuance of new shares or the structure of a company's capital.

Who is affected?

The entity that issues the preferred stock (the corporation) and the holders who own it are affected. The rights conferred by the preferred stock dictate their financial standing relative to common stockholders.

How does it work?

In practice, preferred stock dictates the terms of ownership; for instance, if a company issues preferred stock, the holder has specific rights defined in the offering prospectus. This often involves determining dividend priority or voting power.

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Wikipedia

Preferred stock

Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt instrument, and...

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Disclaimer: We do not provide legal advice. We translate legal language into plain English and help you prepare for a conversation with a lawyer.