Follow Us

Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Bankruptcy Litigation

Preferred Equity In Peril?

Two Recent Cases Shed Light on Potential Risks to Preferred Equity Holders in Chapter 11

Preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that it is entitled to a “liquidation preference” ahead of common stock. Whether the liquidation preference of preferred equity entitles preferred shareholders to priority over common shareholders in a Chapter 11 reorganization is a question that figured prominently in two recent high profile cases.

X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

Preferred equity instruments have become increasingly popular as a source of financing for private equity sponsors executing large leveraged acquisitions. Investors seeking the risk profile of debt but also the return potential of equity are attracted to the hybrid nature of preferred equity, which generally ranks senior to common equity interests (like debt) and may entitle the holder to common equity-like upside. By law, preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that the preferred equity is entitled to a “liquidation preference” ahead of common stock. The liquidation preference is typically triggered upon a “liquidation, dissolution or winding up” whether “voluntary or involuntary” and most often equal to a fixed dollar amount per share plus accrued and unpaid dividends to the date of the liquidation, dissolution or winding up.

To continue reading,
become a free ALM digital reader

Benefits include:

*May exclude premium content

Read These Next