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1. The Rights of Common Shareholders
1. Claim to Income. All firm income that is not paid out to bondholders or preferred stockholders belongs to the common stockholders of the firm, who are the ultimate owners of the firm. They have a Critical Concept claim to income. Common stockholders are not guaranteed dividends. The residual income of the firm may go to either retained earnings, in the case of a growing firm, or dividends, in the case of a mature firm. More and more, large institutions, like pension funds and mutual funds, own a greater percentage of the common stock of U.S. corporations. Common stockholders have the right to vote on all major issues regarding the firm. See Slide Common Stock (53.0K)
2. The Voting Right. Common shareholders have the right to vote but may assign their proxy to management or some outside group. A proxy is Key Term. Companies may have different classifications of common stock. Founders stock represents the shares owned by the founders of the company and is often in a special class by itself. Even though there are different shares of common stock, all common stockholders have voting rights.
3. Majority and Cumulative Voting. If the firm has majority voting, the board of directors can be elected by 51% of the votes. Under majority voting, minority shareholders do not have representation on the board. Critical Concept voting allows shareholders to have more than one vote. They can multiply their number of shares by the number of members of the board of directors to determine their number of votes. This means minority shareholders can have board representation. See Slide The Voting Right (53.0K) For a discussion of cumulative voting and how it protects minority shareholders, take a look at this website (1706).
4. The Right to Purchase New Shares. Corporate charters may have a Critical Concept rights provision, which allows current owners of common stock the first option to purchase new shares. This provision protects current shareholders from earnings dilution as well as voting rights dilution. Each shareholder is entitled to one right for each share of stock owned. When a rights offering is made, a stock trades Critical Concept. In other words, each shareholder acquires one right toward the future purchase of the stock. After a certain time period, the stock goes Critical Concept, which means you no longer get a right toward the future purchase of the stock. This happens at some point after the initial rights offering. When the stock goes ex-rights, its price drops by the theoretical value of the right. See Slide Rights-On and Ex-Rights (54.0K) . Here is an interesting article on shareholder rights (1711).
5. Advantages of Rights Offerings. Rights offerings give shareholders first option to purchase stock, which stops voting and earnings dilution. Instead of searching for new shareholders, rights offerings gives the issuing firm a built-in market for their shares. Generally, a rights offering generates more interest from the market since not only does the stock have value, but so do the rights. Stocks purchased through a rights offering have lower Key Term which is the amount of cash or equity that must be deposited with a brokerage with the balance of the funds available for borrowing as defined (1713) by The Columbia Encyclopedia, 2001.
6. Poison Pills. A poison pill is a rights offering made to existing shareholders to make the company unattractive as a takeover target. A poison pill may have three effects. Critical Concept. Generally, a poison pill defense makes shares available for purchase by existing shareholders at very low prices. See Slide Poison Pill (63.0K)
7. American Depository Receipts (ADRs). ADRs are certificates that have a legal claim on an ownership interest in a foreign company's common stock. They allow foreign shares to be traded in the U.S. much like a common stock except the shareholder of ADRs are exposed to foreign currency risk.
2. Preferred Stock Financing
1. What is Preferred Stock? Preferred stock has few unique characteristics although shareholders of preferred stock in a business firm are entitled to dividends before common shareholders. Preferred stockholders, however, have no ownership interest in the firm and dividends do not have to be paid to them. They are simply entitled to them ahead of common shareholders. Take a look at this definition (1716).
2. Characteristics of Preferred Stock. Preferred stock allows the firm to expand its capital base without diluting its common stock. However, preferred dividends, like common dividends, are not tax-deductible. Corporations like to own the preferred stock of other corporations since only 30% of preferred dividends are tax deductible. See Slide Preferred Stock (59.0K)
3. Provisions Associated with Preferred Stock. Most preferred stock has a cumulative claim to dividends. Preferred shares may be convertible in shares of Critical Concept. Like debt, preferred stock may have a Critical Concept provision. Preferred stock issues may profit from good years and participate over and above the quoted yield. Some preferred stock issues have floating interest rates, which means they change, usually quarterly, based on market conditions. Dutch auction preferred stock is a floating rate preferred with a short-term maturity. While the par value of common stock is usually only a fraction of its market value, the par value of preferred stock is set at the anticipated market value. See Slide Provisions Associated with Preferred Stock (62.0K) for a comparison of common stock, preferred stock and debt and Slide 2 (57.0K) for a comparison of risk and return for the three types of securities.