Why do companies issue liquidating dividends
Non-participating preferred stock will not share in the liquidation proceeds on a pro rata basis with common stock after payment of the liquidation preference. If the proceeds are sufficient, then the holders of the preferred stock will voluntarily convert their preferred stock to common stock to maximize their share of the proceeds.
Fully participating stock will share in the liquidation proceeds on a pro rata basis with common stock after payment of the liquidation preference.
Instead of a distribution from retained earnings, stockholders receive a return of capital.
Also a distribution of assets from a company that is going out of business.
Consider the following case study: Propco Ltd is a property investment company, set up two years ago by Steve, who is the sole shareholder. He pays income tax at 40% as he has a well paid job. After selling all its properties and paying all its tax, Propco is left with £700,000 in the bank, and no other assets or liabilities.
Preferred convertible stock includes two key features that skew the exit returns in the investor’s favour—liquidation preference and dividends.
As every share counts as a vote in the company, the more shares you have the more votes you have - for example, a person with 5 shares can out-vote a person with 4 shares.