It is sometimes deemed advisable to have several issues of preferred stock, one taking precedence over the next, just as ordi nary preferred takes precedence over common. These several issues are then usually classified as ist preferred, 2nd preferred, 3rd preferred and so on, or sometimes as preferred A, preferred B, preferred C.
These two great classes of stock, common and preferred, have not by any means satisfied the wants of investors and speculators, and hence a large number of variations have grown up, particularly in preferred stock, affecting the income, control or risk of the stockholders in various manners. The more important of these various classes will be explained.
Non-Participating and Participating.—Non-participating pre ferred stock is stock which, through the terms of its issue and sale, is to receive a preferential dividend at a stipulated rate, usually about 6%, and nothing whatever beyond that, all other dividend, regardless of its amount, going to the common stock.
Participating preferred stock is that which is to receive first its preferential dividend at the stipulated rate and after that is to participate or share with the other stock in the remainder of the funds declared as dividend. This participation or sharing may be done in one of a number of ways, but regardless of the man ner of participation, if the preferred stock shares in any way in the dividend over and above its stipulated rate, it is participating stock. The methods of participation are generally known as "par ticipating simply," "participating immediately" and "participating specially." Simple Participating.—Simple or ordinary participation is an arrangement whereby the preferred stock first gets its dividends up to the specified rate ; after that the common stock will be paid dividends as far as possible up to and including the same rate that the preferred has received ; if, after having paid both the pre ferred and the common the same rate of dividend, there be any thing left of the total amount declared as dividend, it is shared or participated in by both the preferred and common alike, just as though they were only one class.
The term "participating preferred stock" in itself means that it is simply participating.
Participating Immediately.—Preferred stock is said to be im mediately participating when the arrangement for apportioning the dividend among the classes of stock provides that the pre ferred stock first receives dividend up to the specified rate and that immediately thereafter without first giving the common stock a dividend payment at the same rate, all the remainder of the dividend money is allotted to all stock alike, regardless of whether it be preferred or common.
Participating Specially.—The above described methods of par ticipation are, however, by no means the only ones. As a matter of fact, the number of methods of participation is limited only by the ingenuity of the company organizers. It is possible, for in stance, to have the preferred get 6%, then the common 6%, then the preferred all the remainder; or the preferred 6%, then common 6%, then preferred 4%, then common 2% and the remainder pro rata; or preferred 5%, then common 6%, then all the re mainder to preferred and common in the proportion of two to one ; or any other arrangement whatever that may be provided in the certificate of incorporation, which in this respect constitutes a contract between the company and the stockholder.
Non-cumulative and Cumulative.—The dividends on preferred stock may be non-cumulative or cumulative. Provision is often made in the certificate of incorporation that if sufficient dividends are not declared in any one year to pay the full dividend on the preferred stock, there is no obligation on the part of the corpora tion to make up the deficiency in any subsequent year. This means that dividends or parts of dividends not paid to preferred stockholders in any given year are lost to them forever. Stock governed by this provision is known as "non-cumulative." Cumulative preferred stock, on the other hand, is stock, the stipulated dividend of which, if not paid in full in one or more years, carries over from year to year till fully paid. When divi dends have not been declared, or have been declared in amount insufficient to pay the full specified rate of dividend on this cumu lative preferred stock, they are in arrears and as long as they are unpaid they constitute a claim on future earnings prior to any dividend claim of the common stock. In other words, com mon stockholders are not entitled to receive any dividend as long as the cumulative preferred stock dividends are in arrears. In case the certificate of incorporation makes no provision concern ing whether or not the preferred stock dividend is to be cumula tive, it has been held by the courts that the dividend shall be cumulative.