Preferred shares (as a means of attracting investment funds)
The notion of heroism is connected to our thinking, on a first level, with battlefields and national struggles – it is well known what Winston Churchill said to this respect for the heroes and the Greeks. But true heroes are also those of everyday life-those of the next door. Not only today but always. It has been written that “in the Odyssey, heroism is not that of battlefields but the endless struggle of the survival and success of post-war peaceful purposes such as development, trade …”.
It is, therefore, a rule for companies to have the need (and, sometimes, a lust) to obtain liquidity. Other times the basic one and sometimes the necessary for investments. As the banking system does not tend to “prosper” to such demands, entrepreneurs (smaller or bigger heroes of everyday life) seek to create the necessary conditions and incentives to attract capital. Such incentives, taking advantage of the law’s options, can be given, as already stated in our previous articles, through warrantsand/or redeemable shares.
The “privileges” of investors and the benefits for the business
Why, however, preferred shares are seen as an instrument or form of financing and, moreover, more attractive than others (e.g. a bond loan or common stock)?
The investor (whether a retail investor or not) is looking for alternatives other than to date to place his savings. Most of it and its participation in the share capital of the company-as owner of preferred shares.
The privileges that can be given to the shares in question can be moved in a very broad context. In some cases, however, more interesting for the investor (and probably also for the business) would be: (a) the provision of a fixed dividend, (b) the drawing of interest and (c) the participation, in priority, to the company’s profits from particular business activity.
The ability to liquidate them could also be a special “privilege”: As we can redeem preferred shares, the time and manner of liquidation of the investment will be predetermined. As well as the overall-final benefit of the investor.
And in terms of business? It is important to stress that preferred shares broaden their capital base and improve its financial ratios and creditworthiness. Voting rights may not be a problem as preferred shares may be issued without voting rights.
In conclusion
The institution of the issue of preferred shares is, to a considerable extent, unknown in terms of its potential exploitation at the business level. However, the options and flexibility of the law and the possibility of combining it with similar institutions (e.g. redeemable shares) can make preferred shares an important tool in trying to attract investment funds. Finally, the potential claim of investors to place their funds in a company through the acquisition of shares with privileges focused on their desires, needs and requirements, and with a predetermined time and price for their disintegration, can make their respective investment more attractive and safer.
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 7th, 2019).
