Preferred shares

Preferred shares

A class of shares which, unlike ordinary shares, does not carry voting rights. Instead, preferred shares usually take precedence over ordinary shares when it comes to the distribution of profits and the liquidation proceeds of a stock corporation.

A stock corporation can issue both ordinary and preferred shares; however, the share of the capital stock accounted for by preferred shares must not exceed that of the ordinary shares. The ordinary and preferred shares of a company are traded separately on the exchange; preferred shares are designated by supplementing the stock exchange code with a "3". Because they do not carry voting rights, they usually receive a lower valuation than ordinary shares. On the German exchanges, preferred shares are usually referred to as "Vorzüge" (for "Vorzugsaktien").

The special rights attached to preferred shares typically include a larger dividend (the so-called preferred dividend). Moreover, preferred shares can be cumulative, which means that passed dividends (dividends not paid for any reason) can be made up in subsequent years. The charter of the stock corporation contains regulations pertaining to the special privileges vested in these shares.

If the preferred dividends for a given year are passed, or not paid in full, the preferred shareholders are entitled to voting rights until the dividend arrears have been made up. In this case, preferred shareholders must be taken into account when counting votes.