The most important item on the proxy for upcoming annual shareholder meeting:
Proposal 2. Approval of Preferred Stock. To authorize the amendment of the Company’s Articles of Incorporation for the purpose of authorizing up to 10,000,000 shares of preferred stock of the Company, par value $0.001.
I believe most of the posters on ths MB are sophisticated investor who understand the diferent ways that companies do raise cash: Obtain loans, sell bonds, and issue common and preferred shares. At different stages of a company's life, any of the above is appropriate, even for cash rich companies like apple who has continued to sell bonds despite having billions of dollars in their coufers. While they have more than suficient cash to pay the quarterly dividend, they did not want to use their foregin earned cash until they got a better tax rate from the US government before repatriating their bounty. I believe they also issue preferred shares.
Apologies to most of you, whom I believe to be sophisticated investors and already know this. However, I post the following to remind us all of why the upcoming vote for the authorization to issues preferred stock is very important. Not asking anyone to go either way but just to exercise informed judgement and not be persuaded by some the mostly negative speculation that is posted here on the subject. Dr. M does not need this fo afford his hair cut. You can guess my bias.
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Why Corporations Supply Preference Shares
Although preferred stock acts similarly to bond issues, in that it pays a steady dividend and its value does not often fluctuate, it is considered an equity issue. Companies that offer equity in lieu of debt issues can accomplish a lower debt-to-equity ratio and, therefore, gain greater leverage as it relates to future financing needs from new investors.
A company's debt-to-equity ratio is one of the most common metrics used to analyze the financial stability of a business. The lower this number is, the more attractive the business looks to investors. Additionally, bond issues can be a red flag for potential buyers because the strict schedule of repayments for debt obligations must be adhered to, no matter what a company's financial circumstances are. Preferred stocks do not follow the same guidelines of debt repayment because they are equity issues.
Corporations also might value preference shares for their call feature. Most, but not all, preferred stock is callable. After a set date, the issuer can call the shares at par value to avoid significant interest rate risk or opportunity cost.
Owners of preference shares also do not have normal voting rights. So a company can issue preferred stock without upsetting controlling balances in the corporate structure.
Although common stock is the most flexible type of investment offered by a company, it gives shareholders more control than some business owners may feel comfortable with. Common stock provides a degree of voting rights to shareholders, allowing them an opportunity to impact crucial managerial decisions. Companies that want to limit the control they give to stockholders while still offering equity positions in their businesses may then turn to preferred stock as an alternative or supplement to common stock. Preferred stockholders do not own voting shares like common stockholders do and, therefore, have less influence on corporate policymaking decisions and board of director selections.
Finally, some preference shares act as "poison pills" in the event of a hostile takeover. This normally takes the form of a detrimental financial adjustment with the stock that can only be exercised when controlling interest changes.
