Preferred Stock Investing Corporation Difficulty

In some instances where a corporation falls into financial difficulties, the sale of assets may leave little or nothing to satisfy the legal claims of the preferred stockholders after the bondholders have been paid off. From this point of view, it is obvious that the financial good health of any corporation is worthy of study.

Voting power is not conferred upon the preferred stockholders in most cases, although there is usually a provision that when arrears are accumulated such stockholders may have the right to elect a certain number of directors in order to protect their interests. In some cases this regulation comes into effect if the arrears amount to four successive quarterly payments; in others it may be specified in years, since the management must be given some opportunity to rectify matters.

Still another kind of voting power given to preferred stockholders is that which permits them to vote as a class to block certain proposals which might endanger their rights and the rank of their stock. This veto power is most frequently applied to such matters as (a) proposed liquidation; (b) authorization of other preferred and/or bonded indebtedness; (c) proposed merger; (d) any change in the stated rights of the preferred shares.