Can bonds be converted into preferred shares? Stock

31.01.202327.05.2017

A share is an issue-grade security that secures the rights of its owner (shareholder) to receive part of the JSC’s profit in the form of dividends, to participate in the management of the JSC and to part of the property remaining after its liquidation (Article 2 of the Federal Law of April 22, 1996 N 39-FZ “ On the securities market").

There are ordinary and preferred shares, distributed by open or closed subscription. Owners of ordinary shares of the company can participate in the general meeting of shareholders (hereinafter referred to as the GMS), have the right to vote on all issues within its competence and the right to receive dividends, and in the event of liquidation of the JSC, they have the right to receive part of the property (Article 31 of the Federal Law of December 26, 1995 year N 208-FZ). Each ordinary share gives its owner the same amount of rights and is not subject to conversion into preferred shares or other securities.

JSCs can issue preferred shares of several types, and the company's charter must determine the amount of dividend and (or) the value paid upon liquidation of the company (liquidation value) for each type of preferred shares. The order of payment of dividends and the liquidation value of each type of preferred shares are determined.

There are cumulative and convertible shares. For preferred cumulative shares, unpaid or incompletely paid dividends are accumulated and paid no later than the period determined by the charter of the joint-stock company.

The company's charter may provide for the conversion of preferred shares of a certain type into ordinary shares or preferred shares of other types at the request of the shareholders - their owners, or the conversion of all shares of this type within the period specified by the company's charter. Conversion of preferred shares into bonds and other securities, with the exception of shares, is not permitted. Conversion of preferred shares into ordinary shares and preferred shares of other types is permitted only if this is provided for by the company's charter, as well as during the reorganization of the company.

Shareholders - owners of preferred shares of a certain type, the amount of dividend for which is determined in the company's charter, with the exception of shareholders - owners of cumulative preferred shares, have the right to participate in the General Meeting of General Meetings with the right to vote on all issues within its competence, starting from the meeting following the annual General General Meeting, on in which, regardless of the reasons, a decision was not made to pay dividends or a decision was made to pay incomplete dividends on preferred shares of this type. The right of shareholders - owners of preferred shares of this type to participate in the General Meeting of General Meetings terminates from the moment of the first payment of dividends on these shares in full.

Shareholders - owners of cumulative preferred shares of a certain type have the right to participate in the General Meeting of Shares with the right to vote on all issues within its competence, starting from the meeting following the annual General Meeting of Shares, at which a decision should have been made on the payment of the full amount of accumulated dividends on these shares, if such a decision was not made or a decision was made on incomplete payment of dividends. The right of shareholders - owners of cumulative preferred shares of a certain type to participate in the General Meeting of General Meetings terminates from the moment of payment of all accumulated dividends on these shares in full.

Often, organizations, when carrying out financial and economic activities, invest free funds in securities (including shares) of other enterprises. This type of investment refers to financial investments (clause 3 of the Accounting Regulations “Accounting for Financial Investments” PBU 19/02, approved by Order of the Ministry of Finance of the Russian Federation dated December 10, 2003 N 126n).

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Preference shares- this is a special type of equity securities, which, unlike ordinary shares, have special rights, but also have a number of specific restrictions.

Preferred shares are a common financial instrument in Russia and around the world.

It allows the owner to receive a guaranteed income based on the dividend rates offered by the issuer of the securities.

Also, in some cases, the holder of such shares can influence the company’s development strategy.

Advantages of preferred shares

Preferred shares have a number of advantages for investors when compared to ordinary securities.

Firstly, the owner of preferred shares is almost always guaranteed some income.

Namely, preferred shares accrue a fixed income, unlike ordinary shares, which depend on the profit of the joint-stock company.

However, dividends are not paid if the company has incurred losses.

Secondly, funds for the payment of dividends are allocated to holders of such securities as a matter of priority.

That is, holders of preferred shares also have the right to receive part of the property of the joint stock company in the event of its liquidation, before it is divided among other owners.

Thirdly, dividends on preferred shares are usually fixed in the total net profit.

In addition, these shareholders may have additional rights specified in the company's charter documents.

For example, they may, under certain conditions, convert their preferred shares into .

Disadvantages of preferred shares

There are also disadvantages to owning preferred shares:

The issuing company may demand the shares back from the shareholder without giving reasons, while fully compensating the damage with interest;

Preferred shares often do not carry voting rights. That is, holders of privileged rights are deprived of the right to vote and, thus, deprived of the opportunity to participate in the management process of the joint-stock company and make decisions important for society;

Fixed dividend amount. Often the amount of dividends is indicated when issuing securities of this type and does not depend on the size of the company’s profit, which, with an increase in business profitability, entails a proportional decrease in the profitability of these securities.

How are preferred shares different from ordinary shares?

The very name “preferred” shares suggests that such shares provide additional opportunities and rights, so to speak, a special status.

As a rule, such benefits include the payment of guaranteed dividends.

That is, the owner of preferred shares will receive payments regardless of how the shareholders are doing - the joint stock company will receive profits or losses.

Also, unlike ordinary shares, preferred shares give the right to receive a share of the company's assets after its liquidation.

That is, the preferred shareholder will receive a predetermined amount from the joint stock company.

For such benefits, the owner of preferred shares is deprived of the opportunity to participate in voting and influence the decisions of the joint-stock company.

Thus, the owner of such shares is an indifferent investor, so to speak, not a co-owner of the business, which cannot be said about those who own ordinary shares.

However, some cases of privileges may involve just influence on the affairs of the company. In this case, the charter of the joint-stock company provides for the ratio of votes of owners of ordinary and preferred shares, for example 1:2. So, it turns out that the owner of one preferred share has two votes.

Certain cases provide the right to influence the affairs of the company and participate in meetings to those owners who cannot vote.

Such cases are also provided for by law to protect the interests of owners. Thus, the holders of all shares issued by the company can influence decisions related to the liquidation or reorganization of the company.

There are also issues relating to shareholders that cannot be resolved without their participation. For example, when guaranteed dividends are reduced.

If the JSC is unable to pay guaranteed dividends, then the preferred shareholder receives full right to participate in company meetings on all issues.

It's also worth noting that preference shares can be convertible and cumulative.

Rights of preference shareholders

Holders of preferred securities, on the same basis as the main shareholders, receive a share in the authorized capital of the company and have the right to attend general meetings.

Despite the fact that the holder of such securities does not have voting rights, he can participate in shareholder meetings and claim a share of the property upon liquidation of the organization.

Admission to voting

In general, holders of preferred shares are not allowed to vote.

An exception may be cases when decisions made during the relevant negotiations affect the personal interests of the owners of securities.

In particular, if there are particularly important issues on the meeting agenda, preferred asset holders can vote. These could be questions reflecting the procedure for a possible reorganization of the company or liquidation of the company, those related to making adjustments to the charter, those related to the rights of holders of preferred shares or, for example, the payment of dividends.

Types of preferred shares

Preferred shares are divided into classes with varying amounts of rights.

According to the Law of the Russian Federation “On Joint-Stock Companies,” there are basically two main types of preferred shares: cumulative and convertible.

Dividends on cumulative preferred shares may not be paid in normal reporting periods by decision of the general meeting of shareholders if there is no profit or if it is completely used for the development of the company.

At the same time, the obligation to pay lost income remains.

Dividends are accumulated and paid after the financial position of the joint stock company has stabilized.

That is, the peculiarity of cumulative preferred shares is the accumulation of dividends. Owners of cumulative preferred shares have the right to accumulate unpaid dividends, accrue them and pay them in the period following the missed period. In this case, dividends are not subject to periodic payment.

The holder of a cumulative share acquires the right to vote at a meeting of shareholders for the period during which he did not receive dividends, and loses it after the payment of dividends.

Convertible preferred stock can be exchanged by the owner of the stock during a specified period for common stock or another type of preferred stock.

When issuing such securities, the rate, proportionality and exchange period are determined.

There are also the following types of preferred shares:

non-cumulative, for which unpaid dividends are not added to the dividends of subsequent years;

unconverted, which cannot change their status;

with participation shares that entitle the holders of these shares to receive additional dividends in excess of the stipulated dividends.

Results

The advantages of preferred shares include the shareholder's rights:

receive a fixed income or income in the form of a percentage of the value of shares, or a certain amount of money that is paid regardless of the results of the joint-stock company’s activities;

to receive dividends first;

for preferential participation after satisfying the creditors' claims in the distribution of property remaining with the joint-stock company upon its liquidation;

for an additional payment if the amount of dividends paid on ordinary shares exceeds the amount of dividends paid on preferred shares.

Note that if you want to invest in long-term investments, then the method of purchasing preference shares is the most suitable.

Still have questions about accounting and taxes? Ask them on the accounting forum.

Preference shares: details for an accountant

Justification of revenues in terms of financial and economic activities
2,000 common shares and 800 preferred shares. According to the forecasts of the joint-stock company, per... pcs. with a par value of 1 thousand rubles, preferred shares - 500 thousand pieces. with a nominal value of 1 ... thousand rubles. Dividends on preferred shares are 8% of the par value of the share... let's calculate the annual amount of dividends on preferred shares: Income plan 2019 (2020, 2021...
Key indicators of the economic strength of the enterprise and the level of performance of its owner and management team

Shareholders often contact us with a desire to sell certain shares. Sometimes, when they hear the final price of their shares, they are very surprised. Their surprise is due to the fact that they really expected to hear a completely different number. And both up and down.

It's not all about our greed or the complete ignorance of shareholders, but about the conversion of shares. Over the many years of owning shares, shareholders simply did not know that since then there had been a conversion of their shares (and sometimes more than one). The shares of many companies have undergone changes, i.e. conversion.

The most “harmless” type of conversion of shares is when preferred shares are converted into ordinary shares one for one, i.e. 1 preferred share simply became 1 ordinary share and the total number of shares in this case is easy to calculate. For example, such conversion occurred in companies such as Lukoil, Rosneft and a number of others.

But most often the conversion does not occur 1 to 1, i.e. for example, 1 share can be converted into 5 or vice versa - 5 into 1. And it happens that the company completely changed its legal name or merged with another company.

To sort out this whole “conversion mess,” we decided to post reliable information on the conversion of each specific issuer (enterprise) separately:

Conversion of Alrosa shares

Alrosa shares were fragmented, i.e. 1 old(active) promotion turned into 27005 new. But the final value of the stake has not changed.

Conversion of Norilsk Nickel shares

The Norilsk Nickel enterprise was previously a Russian Joint Stock Company (RAO), now the enterprise is called the Norilsk Nickel Mining and Metallurgical Combine (MMC). All shares of RAO Norilsk Nickel were converted into MMC Norilsk Nickel in proportion 1 to 1, but provided that the shareholder wrote an application for transfer of shares(at one time, the company sent each shareholder a written notice of the mandatory transfer of shares). Otherwise, the shares are invalid and it is impossible to sell shares of RAO Norilsk Nickel now.

Conversion of Lukoil shares

Lukoil shares were easily converted. 1 preferred share converted to 1 ordinary share, i.e. 1 to 1.

Conversion of Rosneft shares

Rosneft shares were also easily converted. 1 preferred share V 1 ordinary share, i.e. 1 to 1.

But several once separate companies also converted to Rosneft, and here the proportions are completely different:

Sakhalinmorneftegaz:

1 ordinary share was converted into 2.98 ordinary shares of Rosneft

1 preferred share was converted into 2.23 ordinary shares of Rosneft

Purneftegaz:

1 ordinary share was converted into 6.09 ordinary shares of Rosneft

1 preferred share was converted into 4.57 ordinary shares of Rosneft

Stavropolneftegaz:

1 ordinary share was converted into 24 ordinary shares of Rosneft

1 preferred share was converted into 16.8 ordinary shares of Rosneft

Arkhangelsknefteprodukt:

1 ordinary share was converted into 0.376 ordinary shares of Rosneft

1 preferred share was converted into 0.263 ordinary shares of Rosneft

Conversion of Rostelecom shares

At Rostelecom, the conversion of shares took place in 2012. Many shareholders have statements with the number of shares that does not correspond to the real number. The fact is that before the conversion there were several companies (in the regions of Russia): Dalsvyaz, Dagsvyazinform, Volgatelecom, North-West Telecom, Sibirtelecom, Uralsvyazbinform, Central Telecommunications Company, Southern Telecommunications Company. All these companies were converted into 1 company - Rostelecom.

Moreover, all ordinary and preferred shares were converted only into ordinary shares. The best way to check the conversion and find out the number of Rostelecom shares you currently own is on the Rostelecom website. To do this, just enter “Rostelecom calculator” in any search engine. Rostelecom shareholders also receive voting letters indicating the number of votes. This is the number of ordinary shares owned by the shareholder.

Conversion of Sberbank shares

The majority of shareholders received their Sberbank shares in 1993 in the form of special certificates. 1 ordinary share of 1993 was converted into 1000 ordinary shares, and 1 preferred share was converted into 20 preferred shares.

Conversion of Tatneft shares

1 Tatneft share in 1994 was converted into 100 shares. This applies equally to both ordinary and preferred shares.

Conversion of MMK shares

1 share of Magnitogorsk Metallurgical Plant (MMK) was converted into 1,200 shares.

Convertible preferred stock is preferred stock that can be converted into common stock at the option of the shareholder. This forces the shareholder to choose between earning profits through liquidation preference or through common stock.

Of course, if the value offered for a company exceeds the estimated total value of the enterprise at the time of investment, the shareholder will convert the preferred shares into common shares to realize his share of the appreciation.

The table below shows the payoffs for Max and Sam at different exit values if Max were to hold convertible preferred stock.

In theory, convertible preferred stock allows the entrepreneur to match the investor's earnings after the investor's initial investment has been paid off. Compare the net payout schedule for convertible preferred shares with the previous net payout schedule for mandatory preferred shares (see table).

Net payout table
for a structure with participation
convertible preferred shares.

If Max in our example had convertible preferred stock, YippeeZang's offering! to purchase the company would force him to decide whether to convert the shares. Let us remind you that after the conversion, Max will own almost half of the company's shares.

If he had converted the preferred stock into common stock, he would have received 49.95% of the proceeds (about $1 million), leaving him at a loss. That's why he wouldn't convert the shares, but instead would get back his original $1.5 million investment from the redemption of the non-convertible preferred stock, and Sam would get the remaining $500,000.

On the other hand, if YippeeZang! decided to pay more than $3 million for Sam's company, Max would have an incentive to convert the shares into common stock to receive his share (49.95%) of any premium over the estimated $3 million company value that YippeeZang! would offer.

If, for example, YippeeZang! would have offered $4 million, Max would have happily converted the shares and received $2 million.

One of the results of the convertible preferred stock structure is that Max receives every dollar of the sale of the company as long as the price of the company does not exceed his $1.5 million advantage. Max will then have to decide whether to convert the shares or exercise his advantage. Until the price reaches $3 million, he would be better off taking advantage of the $1.5 million value.

Thus, on Max's payout schedule there is a "flat area" between the points corresponding to the sale of the company for $1.5 million and for $3 million. In this range, Max always receives $1.5 million and Sam always receives the increase in the company's selling price.

This catch-up is when Sam catches up with Max once Max gets all his money back. At the end of the catch-up phase, the gross (not net) payout amounts that the two participants receive are approximately equal.

Why don't we see any of these types of preferred shares in young public companies? In short, because preferred stock structures are somewhat complex, young public companies avoid them, and stock markets generally expect companies to have a simple capital structure, with only common stock and debt.

Mature public companies, especially financial services companies, often have multiple layers of preferred stock in many forms.

Underwriters almost always insist that all preferred shares be converted at the time of the IPO.

To avoid a round of negotiations during which investors would demand compensation for converting them into common stock, convertible preferred stock typically contains a mandatory conversion clause that allows the company to force investors to convert as part of a guaranteed IPO of a certain (agreed upon) size and price.

The minimum size required to initiate such a conversion is usually significant enough to ensure a liquid market, and the minimum price is usually 2-3 times the price at the time of investment - this is sufficient to guarantee investor interest in the conversion.

Convertible preferred shares with participation rights

Convertible preferred shares with participation rights- are convertible shares with an additional characteristic meaning that in the event of a sale or liquidation of the company, the holder is entitled to receive the par value and their share of the share capital as if the shares had been converted; that is, he participates in the share capital even after conversion.

Like convertible preferred stock, these instruments have a forced conversion clause that is triggered upon public offering. The result is an instrument that behaves like redeemable preferred stock when the company is not public, and converts into common stock when it goes public, as shown in the table below.

Net payout table for structure
with convertible preferred shares
with the right to participate.

*Unlike the mandatory preferred stock structure, the participating convertible preferred stock structure converts to a common stock structure after the IPO.

Of course, the forced conversion clause is the primary reason for using convertible participating preferred stock rather than a compulsory preferred stock structure with low-cost common stock.

Participating convertible preferred stock does not have the inconvenient feature of requiring a payout to private investors at the time of a public offering. This is a trait generally disliked by underwriters because it is easier to sell new public shares if all proceeds are used to grow the company's business rather than pay out existing shareholders.

Participation details: change in control structure

A key accompanying term of the convertible participating preferred stock stipulates when the participation term applies; Usually the condition says “ in case of sale or liquidation”, and it often defines liquidation as any merger or transaction that represents a change in the control structure.

As a result, a merger transaction between two non-public companies may trigger this clause if the privately held, surviving combined company issues new shares in exchange for the acquired company's pre-merger preferred shares.

Holders of convertible participating preferred stock may then request to receive both new shares equivalent in par value to the old preferred stock and participation in the new company's common stock equivalent to the converted shares for common stockholders.

This, in turn, may lead to a valuation problem for the underlying securities, since the condition of participation involves receiving shares whose valuation is equal to the par value of the preferred shares. Note that in such a transaction liquidity as such is not generated ( funds do not change owners) because it represents an exchange of privately held illiquid securities.

1. Shareholders - owners of preferred shares of the company do not have the right to vote at the general meeting of shareholders, unless otherwise established by this Federal Law.