5.4 overview of equity securities Flashcards
The standard voting system, known as statutory voting
grants one vote for each share owned
cumulative voting
allows shareholders to direct all of their votes to specific candidates in board elections.
For example, in an election for 10 board seats, a shareholder who owns one share would be given 10 votes with no restrictions on how they may be allocated. The investor could give one vote to a list of 10 candidates, 10 votes to a single candidate, divide them evenly among 2 candidates, etc.
The cumulative voting system gives better representation to shareholders who own a relatively small number of shares.
Cumulative preference shares
accrue dividends from missed payments that must be paid before common shares receive dividends.
Non-cumulative preference share
permanently forfeit any dividend payments that are not made, but no common share dividends can be paid during a period when non-cumulative preferred dividends have gone unpaid
Participating preference shares
can receive an additional dividend if company profits exceed a specified amount.
They may also receive additional distributions (over face value) in the event of a liquidation.
These securities tend to be issued by smaller, riskier companies.
non-Participating preference shares
do not offer any compensation beyond fixed dividend payments and a claim for their face value in the event of a liquidation.
Private equity securities
are issued via private placements, primarily to institutional investors.
They are highly illiquid because they do not trade on public exchanges.
Types of private equity investments include venture capital, leveraged buyouts, and private investments in public equity.
However, countries still impose foreign investor restrictions for three reasons:
- To limit foreign control of domestic companies
- To give domestic investors the opportunity to own shares of companies that are conducting business in their country
- To reduce the volatility of capital flows
Depository receipts
allow investors to overcome some of the challenges associated with investing directly in foreign markets
A depository share
represents an economic interest in a foreign company, but it trades on an exchange in the investor’s domestic market
The foreign company’s shares are deposited in a bank, which then issues receipts that represent the deposits. In its capacity as custodian and registrar, the depository bank handles dividend payments, stock splits, and other taxable events.
A sponsored DR
issued directly by the foreign company and investors receive the same dividends and voting rights as other common shareholders
an unsponsored DR
the foreign company has no involvement.
The depository bank purchases the company’s shares, issues DRs, and retains the voting rights.
Disclosure requirements are generally more stringent for sponsored DRs.
Global Depository Receipts
issued outside the company’s home country and are generally exempt from any foreign ownership and capital flow restrictions that may be imposed by that country’s government.
Most GDRs are traded on exchanges in London and Luxembourg, but many are listed on other exchanges (e.g., Dubai, Singapore). GDRs may be denominated in any currency, but USD is most common.
GDRs cannot be listed on US exchanges, but they can be sold to US investors through private placements.
American Depository Receipts
A GDR that can be listed on a US exchange is called an American Depository Receipt (ADR)
ADRs are USD-denominated securities that trade like US domestic stocks.
The underlying securities, called American depository shares, are traded in the issuing company’s domestic market.
There are four types of ADRs with differing levels of corporate governance and filing requirements
Level I ADRs trade in the OTC market.
Level II and III ADRs trade on US exchanges (e.g., NYSE, NASDAQ).
The fourth type of ADR, called a Rule 144A depository receipt, is sold to qualified investors through private placements.
