Series 82: 3.2.2.5. Protective Provisions

Taken from our Series 82 Online Guide

3.2.2.5. Protective Provisions

Protective provisions are a relatively standard feature of preferred stocks, often written into a company’s certificate of incorporation. Protective provisions permit preferred shareholders to veto certain actions by the company, such as the sale or merger of the company and the raising of capital. They are designed to protect the preferred stockholders, the minority shareholders, from the unfair dilution of their investment by the common shareholding majority. These veto rights extend to:

Any sale or dissolution of the company

The issue of new shares of stock

The issue of new debt beyond some stated amount

A change to the certificate of incorporation or bylaws

Changes to any rights of other shares that give better rights than their preferred shares

Protective provisions also protect one class of preferred shareholders against another. Series A preferred shareholders, for example, might object to the issuance of a Series B preferred that would have rights senior to their own. Preferred stockholders can veto a corporate action with a 50% or greater majority vote.

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SUMMARY TABLE

Comparison of Common and Preferred Stock

Common

Preferred

Market price

Market price fluctuates with issuer’s profits and losses

Market price fluctuates with interest rates and issuer’s creditworthiness

Risk

More risky, but more growth potential

Less risky, but less growth potential