The issue of preferred shares implies serious perpetual obligations of the JSC to make payments to investors, and this is possible if the company is confident in the stability of its financial position. As the analysis shows, foreign companies quite rarely and in small quantities risk issuing perpetual preferred shares. For the vast majority of issues of such shares, companies stipulate their right to withdraw them after a certain period or to convert them into ordinary shares. Formally, callable preferred shares are considered perpetual, but the issuer can redeem them, as is the case with bonds. Therefore, these shares are called revocable.

The company's right to call preferred shares must be provided for in the terms of the issue. At the same time, a specific date is specified, starting from which the company can fully or partially redeem the shares, or it is indicated how many days in advance the company is obliged to notify investors of the beginning of the redemption. Typically, notification is sent 30 days before the start of the buyout. The notice specifies the redemption price, which provides for reimbursement to the investor of the value of the security, dividends due and a certain amount of premium. Due to the fact that the redemption of preferred shares is an advantage for the company, and not for the investor, the company pays a premium to the holders of preferred shares for the right to redeem, which is usually 1% of the value of the share.

The following valuations can be taken as the basis for determining the value of a preferred share to be repurchased:

• The par value of a share. Establishing the buyback price in the amount of the par value of a share is not entirely correct, since the market price of shares may significantly exceed the face value. In this case, when buying back shares, investors will incur significant losses, since the size of the premium may not compensate for the difference between the market and nominal value of shares;
• · the redemption price stipulated in the charter of the joint-stock company. In this case, as a rule, the charter does not indicate a specific value, but provides a methodology for calculating the redemption price, which is based on the net asset value per share;
• The buyback price at the market value of the shares. In this case, stock quotes on the exchange and over-the-counter markets are taken as the base. The specific buyout price is set by the board of directors with the involvement of an independent appraiser or auditor.

In order to ensure the redemption of revocable preferred shares, in a number of cases, joint-stock companies create a redemption fund. The terms of a share issue with a redemption fund provide for the obligation of the company to buy back shares if their price drops to a certain level. For example, it may be provided that the company allocates funds to a redemption fund in order to redeem 5% of the callable shares annually if their price falls to the level of the offering price. Thanks to this, the owners of revocable shares are protected. If quotes grow, then the company may not redeem shares or buy them at market prices. If quotes fall to a certain level, then the firm buys them back. In this case, the stock price stabilizes. As the buyback proceeds, fewer shares remain outstanding, increasing the value of the assets per share and increasing the market value of the shares.

Many companies, when issuing revocable shares, provide for the creation of a deferred fund. Unlike a redemption fund, it is formed by regular annual allocations in order to redeem the entire issue of callable preferred shares within a certain period of time. The deferred fund is used to purchase shares on the open market, as well as to directly buy shares directly from shareholders. The fundamental difference between a deferred fund and a redemption fund is that if a company fails to acquire shares on the open market, it has the right to offer the owners of shares to sell them at the price of a deferred fund, which may be lower than the market price. A deferred fund, on the one hand, protects the interests of investors when shares are bought on the open market and thereby provides support for the market when market prices decrease. On the other hand, if the market price of the shares is higher than the price of the deferred fund, then the investor incurs certain losses when the shares are withdrawn. However, the remaining outstanding shares increase in value and may pay a higher dividend as the profit is spread over fewer shares.

Usually redemption of callable shares is a privilege of the company. But the investor does not have clear guarantees that these shares will definitely be redeemed. In order to increase the attractiveness of revocable preferred shares, in some cases, retractable shares are issued, the redemption right of which belongs to the investor. The owner of a share has the right to present it for redemption at a predetermined price, having previously notified the company about it.

In some cases, firms resort to the issuance of convertible preferred shares, the terms of which provide for the possibility of their exchange for ordinary shares. At the same time, the conversion period, the conversion price, the number of ordinary shares that can be received in exchange for one preferred share, and other parameters are set. By analogy with bonds, the conversion price at the initial stage is indicated below the level of market prices for ordinary shares, since otherwise the issue of convertible shares becomes meaningless. In most cases, by issuing convertible preferred shares, the company makes them callable in order to manage the conversion process.

We are often approached by shareholders with a desire to sell certain shares. Sometimes, when they hear the final value of their shares, they are very surprised. Their surprise is due to the fact that they really expected to hear a completely different figure. And both up and down.

It's not about our greed or the complete ignorance of shareholders, but about the conversion of shares. For many years of holding shares, shareholders simply did not know that since then their shares had been converted (and sometimes more than one). The shares of many enterprises have undergone a change, i.е. conversion.

The most “harmless” type of share conversion is when preference shares are converted into ordinary shares one for one, i.e. 1 preferred share simply became 1 ordinary share and the total number of shares in this case is easy to calculate. For example, such a conversion took place in such companies as: Lukoil, Rosneft and a number of others.

But most often the conversion does not occur 1 to 1, i.e. for example, 1 share can be converted into 5 or vice versa - 5 into 1. And it happens that the company completely changed its legal name or merged with another enterprise.

In order to sort out all this “mess of conversions”, we decided to post reliable information on the conversion of each specific issuer (company) separately:

Conversion of Alrosa shares

Alrosa's shares split up, i.е. 1 old(active) share turned into 27005 new. But the total cost of the block of shares has not changed.

Conversion of Norilsk Nickel shares

The Norilsk Nickel enterprise was previously the Russian Joint Stock Company (RAO), now the enterprise is called the Mining and Metallurgical Combine (MMC) Norilsk Nickel. All shares of RAO Norilsk Nickel were converted into MMC Norilsk Nickel in proportion 1 to 1, but on condition that the shareholder wrote an application for the transfer of shares(At one time, the enterprise sent a written notification to each shareholder about the mandatory transfer of shares). Otherwise, the shares are invalid and it is impossible to sell the shares of RAO Norilsk Nickel now.

Conversion of Lukoil shares

Lukoil shares were easily converted. 1 preferred share converted to 1 ordinary share, i.e. 1 to 1.

Conversion of Rosneft shares

Rosneft shares were also easily converted. 1 preferred share in 1 ordinary share, i.e. 1 to 1.

But also several, once separate companies were converted into Rosneft, and here the proportions are already completely different:

Sakhalinmorneftegaz:

1 ordinary share was converted into 2.98 Rosneft ordinary shares

1 preference share was converted into 2.23 Rosneft ordinary shares

Purneftegaz:

1 ordinary share was converted into 6.09 Rosneft ordinary shares

1 preference share was converted into 4.57 Rosneft ordinary shares

Stavropolneftegaz:

1 ordinary share was converted into 24 Rosneft ordinary shares

1 preference share was converted into 16.8 Rosneft ordinary shares

Arkhangelsknefteprodukt:

1 ordinary share was converted into 0.376 Rosneft ordinary shares

1 preference share was converted into 0.263 Rosneft ordinary shares

Conversion of Rostelecom shares

In Rostelecom, the conversion of shares took place in 2012. Many shareholders have statements with the number of shares that does not correspond to the actual number. The fact is that before the conversion there were several companies (by regions of Russia): Dalsvyaz, Dagsvyazinform, Volgatelecom, North-West Telecom, Sibirtelecom, Uralsvyazbinform, Central Telecommunications Company, Southern Telecommunications Company. All these companies were converted into one company - Rostelecom.

Moreover, all shares from ordinary and preferred shares were converted into ordinary shares only. It is best to check the conversion and find out the number of shares of Rostelecom that you own at the moment on the website of Rostelecom itself. To do this, it is enough to enter the "Rostelecom Calculator" in any search engine. Rostelecom shareholders also receive voting letters indicating the number of votes. This is the number of ordinary shares owned by the shareholder.

Conversion of Sberbank shares

Most shareholders received their shares in Sberbank in 1993 in the form special certificates. 1 ordinary share of 1993 was converted into 1000 ordinary shares, and 1 preference share was converted into 20 preference shares.

Conversion of Tatneft shares

1 share of Tatneft in 1994 was converted into 100 shares. This applies equally to both ordinary and preferred shares.

Conversion of MMK shares

1 shares of Magnitogorsk Iron and Steel Works (MMK) were converted into 1,200 shares.

Bank of Russia Regulation No. 428-P, dated August 11, 2014 (as amended on December 18, 2018) "On Securities Issue Standards, the Procedure for State Registration of an Issue (Additional Issue) of Equity Securities, State Registration of Results Reports...

Chapter 50

50.1. The decision on reorganization, as well as merger and accession agreements, if these agreements provide for the consolidation and splitting of shares, may provide for a conversion ratio (distribution ratio) of shares, calculated taking into account the results of their consolidation and splitting, which at the time of their adoption (approval) have not yet implemented. Decisions on splitting and consolidation of shares, as well as a decision on reorganization can be made simultaneously.

50.2. Shares in the reorganization can only be converted into shares. At the same time, ordinary shares can only be converted into ordinary shares, and preference shares - into ordinary or preference shares.

Notes and issuer options may be converted into bonds and issuer options, respectively. In this case, one bond must be converted into one bond granting the same rights, and one issuer option - into one issuer option granting the same rights.

When converting into convertible bonds and issuer options, the number of shares into which they can be converted is determined in accordance with the share conversion ratio.

50.3. Placement of shares of a joint-stock company created as a result of reorganization to shareholders - owners of shares of one category (type) of one joint-stock company being reorganized in the form of a merger or accession, must be carried out on the same terms.

50.4. Securities of a legal entity created as a result of a merger, division, separation and transformation are considered to be placed in accordance with the decision on reorganization in the form of a merger, including a merger agreement, a decision on reorganization in the form of division, separation, transformation on the day of state registration of this legal entity. Securities of the legal entity to which the merger has been carried out are considered to be placed in accordance with the decision on reorganization in the form of merger, including the merger agreement, on the date of making an entry in the unified state register of legal entities on the termination of the activities of the merged legal entity.

50.5. Shares of a joint-stock company being acquired or reorganized in the form of a merger, separation or division, the demand for the redemption of which was presented and which, in accordance with the Federal Law "On Joint-Stock Companies", were redeemed, but were not sold before the date of making an entry on termination in the unified state register of legal entities activities of the acquired joint-stock company or prior to the date of state registration of the joint-stock company created as a result of a merger, spin-off or division, are not converted during reorganization and are not taken into account when distributing shares carried out upon spin-off.

50.6. Additional contributions and other payments for securities placed during the reorganization of a legal entity, as well as related to such placement, are not allowed, with the exception of the paid acquisition of shares upon transformation into a joint-stock company of employees (people's enterprise).

50.7. A legal entity being reorganized is obliged to inform the registrar maintaining the register of securities holders of this legal entity about the fact of filing documents for state registration of a legal entity created as a result of such reorganization (on making an entry on the termination of its activities in the unified state register of legal entities), on the day submission of documents to the body carrying out state registration of legal entities.

The legal entity created as a result of the reorganization (the legal entity to which the merger was made) is obliged to inform the registrar maintaining the register of securities holders of the reorganized legal entity of the fact of its state registration (of making an entry on the termination of the activities of the reorganized legal entity) on the day of making corresponding entry in the unified state register of legal entities.

50.8. Securities of legal entities reorganized by merger, merger, division, separation and transformation are redeemed upon their conversion.

50.9. Placement during the reorganization of shares, as a result of which the nominal value of the preferred shares of the joint-stock company created as a result of the reorganization (of the joint-stock company to which the merger was carried out) exceeds 25 percent of its authorized capital, is prohibited.

50.10. The authorized capital of a joint-stock company established as a result of reorganization may be more (less) than the amount of the authorized capitals of joint-stock companies participating in such reorganization, as well as more (less) than the authorized capital (share capital, share fund, authorized fund) of the legal entity transformed into it .

The amount of authorized capital of joint-stock companies created as a result of division may be more (less) than the authorized capital of a joint-stock company reorganized by such division.

50.11. The authorized capital of a joint-stock company created as a result of a spin-off is formed by reducing the authorized capital and (or) at the expense of other own funds (including additional capital, retained earnings, and others) of the joint-stock company from which the spin-off was made.

The authorized capital of joint-stock companies created as a result of a merger or division is formed from the authorized capital and (or) from other own funds (including additional capital, retained earnings and others) of joint-stock companies reorganized through such a merger or division.

The amount of the increase in the authorized capital of the joint-stock company to which the merger was carried out is formed at the expense of the authorized capital of the merged joint-stock company and (or) at the expense of other own funds (including additional capital, retained earnings and others) of the joint-stock company to which the merger was carried out , and (or) the affiliated joint-stock company.

The authorized capital of a joint-stock company established as a result of transformation is formed at the expense of the authorized (share) capital (share fund, authorized fund) and (or) at the expense of other own funds (including additional capital, retained earnings and others) of a legal entity , reorganized by such a transformation.

50.12. The reorganization of a joint-stock company in the form of a merger or accession with the participation of a legal entity of a different organizational legal form is allowed in cases established by federal laws. The reorganization of a joint-stock company in the form of separation or division, during which a new legal entity of a different organizational legal form is formed, is allowed in cases established by federal laws.

Convertible preference shares are preference shares that can be converted into ordinary shares at the discretion of the shareholder. This forces the shareholder to choose between making a profit through a liquidating advantage or through common stock.

Undoubtedly, if the value offered for the company exceeds the estimated total value of the enterprise at the time of investment, the shareholder will convert the preferred shares into common shares in order to realize his share of the increase in value.

The table below shows the payouts for Max and Sam for different exit values ​​if Max had convertible preferred shares.

In theory, convertible preferred shares allow the entrepreneur to catch up with the investor in earnings after the investor's initial investment has been paid. Compare the net payout schedule for convertible preferred shares with the previous net payout schedule for mandatory redemption preferred shares (see table).

Net Pay Table
for a structure involving
convertible preferred shares.

If Max in our example had convertible preferred shares, the YippeeZang! buying the company would force him to decide whether to convert his shares. Recall that after the conversion, Max will own almost half of the company's shares.

If he had converted the preferred stock into common stock, he would have received 49.95% of the proceeds (about $1 million), leaving him in a loss. That is why he would not have converted the shares, but instead would have returned his initial investment of $1.5 million from the redemption of non-convertible preferred shares, and Sam would have received the remaining $500,000.

On the other hand, if YippeeZang! decided to pay more than $3 million for Sam's company, Max would have an incentive to convert the shares to common stock in order to receive his share (49.95%) of any premium over the estimated $3 million company value that YippeeZang! would offer.

If, for example, YippeeZang! would offer $4 million, Max would gladly convert the shares and receive $2 million.

One result of the convertible preferred stock structure is that Max gets every dollar from the sale of the company as long as the company's value does not exceed his $1.5 million advantage. After that, Max will have to decide whether to convert the shares or use his advantage. Until the price reaches $3 million, it will be better for him to take advantage of the cost of $1.5 million.

Thus, Max's payoff chart has a "flat" between the points corresponding to the sale of the company for $1.5 million and for $3 million. In this range, Max always receives $1.5 million and Sam always receives an amount corresponding to the increase in the sale price of the company.

This catch-up is when Sam catches up to Max once Max gets all his money back. At the end of the catch-up phase, the gross (not net) payouts that the two participants receive are roughly equal.

Why don't we see any of these types of preferred shares in young public companies? In short, because preferred stock structures are somewhat complex, young public companies avoid them, stock markets generally expect companies to have a simple capital structure, involving only common stock and debt.

Mature public companies, especially financial services companies, often have multiple layers of preferred stock in many forms.

Underwriters almost always insist that all preferred shares be converted at the time of the IPO.

To avoid a round of negotiations during which investors demand compensation for their conversion into common shares, convertible preferred shares usually contain a mandatory conversion clause that allows the company to force investors to convert in a guaranteed IPO of a certain (agreed) volume and price.

The minimum size required to trigger such a conversion is usually significant enough to ensure a liquid market, and the minimum price is usually 2-3 times the price at the time of investment - this is quite enough to guarantee the investor's interest in the conversion.

Participating Convertible Preferred Shares

Participating Convertible Preferred Shares- these are convertible shares with the additional characteristic that in the event of a sale or liquidation of the company, the holder is entitled to receive the par value and their share in the share capital, as if the shares had been converted; that is, it participates in equity even after the conversion.

Like convertible preferred shares, these instruments are subject to a forced conversion condition that is triggered upon public offering. What we end up with is an instrument that behaves like a mandatory redemption preferred stock when the company is non-public and converts to common stock on public offering, as shown in the table below.

Structure net payout table
with convertible preferred shares
with the right to participate.

* Unlike a compulsory redemption preferred stock structure, convertible participation preferred shares are converted to ordinary shares after the IPO.

Undoubtedly, the forced conversion condition is the main reason for using convertible participation preferred shares instead of a compulsory redemption preferred share structure with cheap common shares.

Convertible participation preferred shares do not have the inconvenient characteristic of being required to pay private investors at the time of public offering. This feature is generally disliked by underwriters as it is easier to sell new public shares if all proceeds are used to grow the company's business rather than pay existing shareholders.

Participation Details: Changing the Control Structure

The key accompanying condition of the convertible participation preference shares specifies when the participation condition is in effect; Usually the condition says " in case of sale or liquidation", and it often defines a liquidation as any merger or transaction that represents a change in the control structure.

As a result, a merger between two non-public companies may trigger this clause if the private, surviving combined company issues new shares in exchange for the acquired company's pre-merger preferred shares.

Holders of convertible participation preference shares may then request both new shares equivalent in par value to the old preference shares and participation in the new company's ordinary shares equivalent to the converted shares for ordinary shareholders.

This, in turn, can lead to a problem of valuation of the relevant securities, since the condition of participation implies the receipt of shares, the valuation of which is equal to the par value of preferred shares. Note that liquidity as such is not generated in such a trade ( money does not change owners) because it is an exchange of private illiquid securities.

Ordinary shares

The owner of an ordinary share has the rights granted by the shares in full (to participate in the general meeting of shareholders with the right to vote on all issues within its competence, to have the right to receive dividends, and in the event of liquidation of the joint-stock company - the right to receive part of its property in the amount of the value of shares).

The conversion of ordinary shares into preferred shares, bonds and other securities is not allowed.

Preferred shares (PA)

The privilege of the owner of the PA is that the charter for the PA of each type must determine the amount of the dividend and (or) the value paid upon liquidation of the JSC (liquidation value). They are determined in a fixed amount of money or as a percentage of the par value of preferred shares.

Preferred shares can have several varieties, and there are no legal restrictions on the number of types of PA. At the same time, the main thing is that the charter of a joint-stock company clearly defines the rights for each type of PA, and their total number does not exceed 25% of the authorized capital.

The holders of preferred shares, for which the amount of the dividend has not been determined, are entitled to receive dividends on an equal basis with the holders of ordinary shares.

If the charter of a JSC provides for preference shares of two or more types, each of which determines the amount of the dividend, the charter of the JSC must also establish the order of payment of dividends for each of them, and if the charter of the JSC provides for two or more types of preferred shares, each of which has a liquidation cost, - the sequence of payment of the liquidation value for each of them.

In exchange for a privilege (a fixed amount of dividend and (or) liquidation value), shareholders - owners of preferred shares do not have the right to vote at the general meeting of shareholders, except for making decisions:

• on reorganization and liquidation of JSC;
• on introducing amendments and additions to the charter of a joint-stock company, which restricts the rights of PA owners;
• full or partial non-payment of dividends on PA with a fixed amount of dividend at the annual meeting of shareholders. The right to vote is lost from the moment of the first payment of dividends on these shares in full.

There are two types of preferred shares in Russia:

• 1) cumulative - shares on which the unpaid or not fully paid dividend, the amount of which is determined by the charter, is accumulated and paid out no later than the period specified by the charter. If the charter of the joint-stock company does not establish such a period, preference shares are not cumulative.
• 2) convertible - shares that can be convertible (exchanged) for ordinary shares or preferred shares of other types at the request of shareholders - their owners within the period specified by the charter of the joint-stock company. In this case, the charter must determine the procedure and conditions for their conversion, including the number, categories (type) of shares into which they are converted, etc. The conversion of preferred shares into ordinary shares and preferred shares of other types is allowed only if this is provided for by the charter of the company, as well as during the reorganization of the JSC. The conversion of preference shares into bonds and other securities, with the exception of shares, is not allowed.

One of the features of issuing shares is that they can pay a dividend. Accrual and payment of dividends is carried out in the manner prescribed by Chapter V of the Law on Joint Stock Companies.

A dividend is a portion of profits paid to shareholders after all other financial obligations have been met and reserves have been replenished to finance the current operations of the organization. Dividends are thus reduced if the organization directs a significant part of its profits to expand production or worsens its financial performance.

Among the features of the activities of joint stock companies should include the fact that the ownership and management of the organization are separated. The company is owned by the shareholders, who appoint a board of directors to manage it on their behalf.

Private investors traditionally buy shares for the purpose of long-term investment and therefore, as a rule, agree to a low dividend for the year if they see the prospect of capital gains as a result of the development of a joint-stock company.

Currently, the main shareholders are institutional investors (pension funds, insurance companies, banks, mutual funds and investment companies). The managers of these organizations administer large sums of money on behalf of a large number of individuals who, by participating in mutual funds or pension funds, are indirect investors.

The initial transfer of cash from investors to issuers in the issuance of shares takes place in the primary market. Since the shares are not redeemed, the organization actually receives cash in perpetuity. When a company's shares are sold on the stock exchange, capital is said to be mobilized on the open or public market, so new issues of this kind are called Initial Public Offerings (IPOs). In order to place its shares on the open market, an organization must meet certain financial criteria.

However, the main volume of exchange transactions is not made on the market of new issues, i.e. primary market, but on the secondary market, where shares are traded after their initial placement.

Trading on stock exchanges is determined by the supply and demand of equilibrium prices for the shares of an individual company, which are influenced by the current and expected financial characteristics of the joint-stock company. The dynamics of the stock market as a whole is determined by many events in the world and national markets, including inflation, interest rates, GDP growth, etc.

To solve the problems they face, organizations have to raise funds for various periods. The source of funds may be the profits of the organization or proceeds from the issuance of short, medium and long-term financial instruments, such as bonds.

Bond- issuance security that secures the right of its owner to receive a bond from the issuer within the period specified in it of its nominal value or other property equivalent. The bond may also provide for the right of its owner to receive a fixed percentage of the nominal value of the bond. (coupon) or other property rights. The yield on a bond is interest and/or discount. The classification of bonds is presented in Table. 15.1.

Bonds are issued in the form of a capital loan, and the buyer of the bond acts as a creditor. The procedure for issuing corporate bonds is regulated by the Law on Joint Stock Companies.

Table 15.1

Classification of bonds in Russian and international practice

The ending

Organizations must maintain a certain balance between borrowed and own funds, not exceeding, on the one hand, the permissible level of borrowing, and on the other hand, avoiding the unwinding of equity capital as a result of excessive issuance of shares.

Investors provide their funds to those who have a need for capital, in the expectation that the money will be returned along with a reward for their use. The amount of remuneration is closely related to the level of risk in the capital market.

It is believed that investing in shares, i.e. entering into fractional ownership of an organization that may not be profitable is more risky than investing in bonds (debt instruments). That is why the owners of shares are counting on their higher profitability, which is made up of the growth in the value of shares and the dividends paid on them. However, dividends are sometimes less than expected, or even not paid at all; It happens that the value of shares also falls. In the worst case scenario, when the organization goes bankrupt, the investor may completely lose his initial investment.

Investors enter the debt market in search of firmer guarantees or more predictable payouts. They lend to the issuer in the belief that it will not cease to exist before the maturity of the bond and will fulfill its debt obligations. In addition, in the event of liquidation of a joint-stock company, in accordance with the law, debt obligations are subject to repayment before settlements with shareholders. In exchange for such guarantees, investors are willing to accept lower returns than they could get from riskier stock investments.