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.
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
