Month: March 2015

Preference shares (also known as preferred stock or preferred shares) are hybrid company securities which give their holders an entitlement to a fixed dividend but which do not usually carry voting rights. Preference shares carry a higher priority to Ordinary shares in the distribution of dividends and the division of the liquidated assets of the company upon insolvency. Preference shareholders are paid fixed-rate dividends before dividends are paid to ordinary shareholders. Preferred shares are more common in private or pre-public companies, where it is useful to distinguish between the control of and the economic interest in the company.

The important difference between preference and ordinary shares are:

1. The dividend on ordinary shares is uncertain and variable (high when the company does well, poor or non-existent when it does badly). Preference shareholders get a fixed dividend which, if not paid, usually accrues until it can be.
2. Each ordinary share usually carries a vote. Preference shares do not usually carry a vote unless dividends fall into arrears.
3. In the event of a winding up, preference shares are usually repayable at par value, and rank above the claims of ordinary shareholders (but behind bank and trade creditors).

There are different kind of preference shares available, such as cumulative and non cumulative preference shares, redeemable and non-redeemable preference shares, convertible and non-convertible preference shares, participating and non participating preference shares. The type used depends upon the object sought to be achieved by the company.

• Cumulative: dividend is accumulated if the company does not earn sufficient profit to pay the dividend i.e., if the dividend is not paid in one year it will be carried forward to successive years;
•  Non-cumulative: if the company is unable to pay the dividend on preference shares because of insufficient profits, the dividend is not accumulated. Preference shares are cumulative unless expressly stated otherwise;
• Participating: participating preference shares, in addition to their fixed dividend, share in the profits of a company at a certain rate;
• Convertible: apart from earning a fixed dividend, convertible preference shares can be converted into ordinary shares on specified terms;
• Redeemable: redeemable preference shares can be redeemed at the option of the company either at a fixed rate on a specified date or over a certain period of time.

For investment advisory, legal advise and transactional due diligence relating to the issuance and purchase of corporate securities, please contact Milton and Cross Commercial Solicitors on +2348038258312 or by email at miltoncrosslexng@gmail.com

Companies borrow money from a range of sources, including their directors and shareholders, personal contacts, banks, venture capital companies, institutional investors and the general public through the Stock Exchange (Public Limited Liability Companies only).

A debenture is the traditional name given to a medium to long term loan agreement or instrument used where the borrower is a company (issuer) and the lender is either an individual or another company. Typically, a debenture will set out the terms of the loan: the amount borrowed, repayment terms, interest, charges securing the loan, provisions for protecting and insuring the property etc., and terms for enforcement if the company defaults. A debenture is transferable and may be held to maturity or traded upon the stock exchange.

Debentures are usually unsecured instruments, backed only by the general creditworthiness and good reputation of the issuer; however, they may be secured by a fixed or floating charge on the current and future assets of the company.Should the issuing company not be able to repay the amount borrowed, the investor can lay claim on the assets of the issuer, and either appoint a receiver to manage the assets and apply the revenues derived therefrom to paying off the loan or exercising the power to sell the assets of the company and apply the revenues to paying off or liquidating the debt.

A debenture may be convertible into shares at a specific date or upon the occurrence of certain specified events or it may be non-convertible. As a general rule, convertible debentures carry a lower rate of interest than non convertible debentures. At the end of the lending period, issuing companies usually offer the choice of converting the debentures for shares (stock or equity).

If you wish to invest in debentures, there are some things to consider:

• Credit risk of the issuer: By investing in a debenture, you are lending your money to a business, with all the risks that this involves. You should examine the revenues and operations of the company to ensure you are not throwing good money down a black hole.
• The debt‐equity ratio: The investor should consider the ratio in which debt is used to finance projects and capital compared to that used for equity. If more debt is used to finance the company, the risk of default and the possible outcome of the insolvency of the company should be considered.
• Liquidity of the company: This refers to a company’s ability to turn their assets into cash and how quickly. If the company has a reputation of being unable to pay interest on loans taken, stay away!

Milton and Cross offers investment advisory and preliminary due diligence services to individuals desirous of investing in debentures and other equity or debt securities. We may be contacted by telephone on +2348036258312; and by email on miltoncrosslexng@gmail.com.