Preference shares

 Preference shares are an alternative to conventional equity or debt finance and share some of the features of both.

Characteristics

While there are different varieties of preference shares used in practice, the most common characteristics are as follows:

Introduction

• The capital is split into shares, each with a nominal value - e.g. £1 prefs
• The shares may be unquoted or traded on established markets and stock exchanges

Risk and return

• Usually unsecured.
• However, preference shareholders rank just ahead of ordinary shareholders (but after all other secured and unsecured creditors) in the event of a winding up order or liquidation.
• Have a fixed dividend that is usually expressed as a percentage of nominal value - e.g. 10% $0.50 prefs would potentially pay a dividend of 10% × $0.50 = $0.05 each year.
• The dividend is at the discretion of directors but a preference dividend must be paid before an ordinary share dividend.
• Dividends are not deductable for corporation tax.
• Considered less risky than ordinary shares ("equity") due to fixed dividend and ranking in liquidation.

Variations on a theme

• May be irredeemable or redeemable
• May be cumulative or non cumulative. With cumulative prefs any shortfall in dividends paid accumulates and must be paid before a dividend can be paid on ordinary shares. With non-cumulative prefs arrears do not accumulate.
• Cumulative and non-cumulative prefs rank equally in the event of a winding up.

Voting rights

• Normally do not carry any voting rights.
• With cumulative prefs, shareholders have a limited right to vote at a general meeting if their dividend is in arrears or if it is proposed to change the legal rights of the shares.
• With non-cumulative prefs, shareholders typically acquire some voting rights if the dividend has not been paid for three years.

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