3.19: Preferred shares
Many companies have an ownership structure that includes both common shares and preferred shares.
In general terms, preferred shares have a preferred claim on the value of the company ahead of the common shares. The terms attached to the preferred shares can vary a great deal and there is no standard. They may or may not have voting rights and voting rights, if any, may be limited to certain specified issues. If they get dividends, they will receive them ahead of the common shares.
Preferred shares may or may not have a specified dividend yield. The preferred shares may have a redeemable or retractable value which may be significantly higher than the amount disclosed on the balance sheet (redeemable = the shares may be redeemed at the option of the company; retractable = the shares may be redeemed at the option of the shareholder).
Preferred shares rank ahead of common shares in respect to the value of the company.
Absent agreements to the contrary, common shares control the company and preferred shares do not. After the preferred shares have received their dividends or redemption amounts, the balance of retained earnings is all available to the common shares.
This means that when the en-bloc value of the company is being allocated in a valuation report, preferred shares will be allocated their redeemable/retractable value with the residue of the value going to the common shares.
A CBV will always look at the actual rights and influences of the different share classes before allocating the value of the company.
Ensure that MVI is aware of all the rights and privileges of the preferred shares in your company before the valuation engagement is complete (especially if such rights are not apparent from the company’s financial and legal documents).