Preferred Stock

Unlike S corporations which, per the Internal Revenue Code, can only issue one class of stock, C corporations can issue multiple classes of stock, with the classes typically comprised of Common Stock (voting and non-voting) and Preferred Stock. The classes of stock authorized, and the rights of the classes, are set forth in a corporation’s Certificate of Incorporation, though additional rights can be granted contractually.

As indicated by its name, holders of Preferred Stock are typically granted rights and priorities not attendant to Common Stock. For instance (i) Preferred Stock usually receives some defined dividend before Common Stock can receive any dividends, (ii) on a sale or dissolution of the corporation Preferred Stockholders will receive payment of some specified amount (often the price paid for the Preferred Stock, or perhaps some multiple of that price) before the holders of the Common Stock receive any distributions, and (iii) the Preferred shareholders will have the right, voting together as a class, to approve certain corporate actions, such as the issuance of stock with rights greater than theirs.

Over the course of time a C corporation may (and usually will) issue different classes of Preferred Stock (for instance, Class A, Class B, Class C), with each succeeding class usually having rights somewhat different from and perhaps greater than those granted the prior class. For instance, the purchase price for each class may be different, and typically a subsequent class will have a priority over liquidating distributions, such that the holders of the last class in the Series must receive their priority return in full before a prior class is paid, with the Common Stockholders standing last in line.

If you would like to know more about Preferred Stock please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com, or at (212) 586-5555.