Definition
Deferred shares are a type of stock that receives dividends after all other classes of shares have been paid. These shares typically don’t have voting rights, but they have a claim on the assets and profits after other shareholders are paid. Essentially, owners of deferred shares are last in line to receive any dividends or any compensation during a liquidation.
Key Takeaways
- Deferred shares are a type of equity investment primarily owned by company founders or managers with a focus on long-term returns. These shares defer any payments of dividends or capital until all other classes of shareholders are paid.
- Unlike common shares, the holders of deferred shares normally do not have voting rights. This makes it a unique investment strategy that limits investors’ control over corporate decisions but has potential for significant payout in the long term.
- Deferred shares carry both potential advantages, such as large remunerations in the event of company success, and disadvantages, such as the lack of voting rights and potential financial loss in the case of company failure.
Importance
Deferred Shares are an important finance term because they represent a special category of share that prioritizes the holders’ rights to dividends and asset distribution in a unique manner. Typically, dividends on Deferred Shares are paid after all other classes of shares have been paid, hence the term “deferred.” This means that the holders of this share class are last in line to receive any dividends or assets.
This can afford the company more flexibility in terms of how and when to distribute profits. The unique structure of these shares also often makes them non-voting, thereby providing no control to the holders over the company’s management or strategy.
However, they may potentially offer greater returns due to their deferred nature. Therefore, understanding the concept of Deferred Shares is crucial to undertake strategic investment decisions and analyze the risk-return tradeoff in a more comprehensive manner.
Explanation
Deferred shares are a unique type of shares primarily used by companies to restrict particular shareholders’ rights. Their purpose is to keep control within the company or among a select group of shareholders and they often play a critical role in the capital structuring process.
They are typically issued to the company’s founding members, directors, or original stakeholders to ensure that the decision-making power remains with certain trusted individuals. These shares sometimes come with privileges, like receiving any left-over profits once dividends on other share classes have been paid, hence the term “deferred”.These shares are important in protecting the company from hostile takeovers as they may carry no voting rights or limited voting rights, preventing potential outside investors from gaining significant control.
Additionally, the lack of dividends makes deferred shares unattractive for ordinary investors looking for immediate returns, thereby ensuring these shares remain with the intended holders. In a liquidation event, deferred shares might receive assets after all other classes of shares, which makes them a riskier investment.
But when used judiciously, they can serve a crucial role in the financial stability and managerial control of a business.
Examples of Deferred Shares
**British Telecom (BT):** In 2001, British Telecom had severe financial issues and needed to raise capital, so they offered deferred shares. These shares had no voting rights and did not receive dividends until a specified date. They were given to existing shareholders in BT, who could later convert them into ordinary shares.
**Huntington Bancshares Incorporated:** In 2008, during the financial crisis, Huntington Bancshares offered deferred shares to bolster their capital. This move was instrumental in the company’s survival over the turbulent period, as they were able to pay dividends to shareholders later when financial health improved.
**The Manchester United Football Club:** In 2010, the Glazer family, the club’s owners, issued deferred shares as a means to reduce the company’s debt and increase cash flow. These shares offered few rights to the holders and dividends were not paid until a specified future date, giving the club time to stabilize its finances.
FAQ Section: Deferred Shares
What Are Deferred Shares?
Deferred shares, often called founders shares or preferred stock, are shares that have specific restrictions that regulate and control when they can be sold or transferred. These restrictions typically involve a company’s performance, a certain length of time, or milestones that need to be met.
What Are The Benefits of Deferred Shares?
Deferred shares can provide a beneficial structure for company founders or key employees. They can incentivize performance and enable the retention of pivotal team members by tying their rewards to the successful output or growth of the company. It can also protect company’s interest by preventing any premature selling or transfer of shares.
Who Typically Owns Deferred Shares?
Deferred shares are typically held by foundational people in a company such as the founders, key employees, or early investors, although they can also be provided to later investors under certain circumstances.
What Happens When The Conditions on Deferred Shares Are Met?
Once the conditions governing the deferred shares are met – whether those conditions are time-based, performance based or a measure of some other factor – the restrictions on the shares are lifted. This means that the shareholders are then free to sell or transfer their shares.
What Are The Risks Associated with Deferred Shares?
Deferred Shares carry a risk that the conditions set for lifting the restrictions might not be met. In such cases, shareholders may have to forfeit their shares. Therefore, investors should fully understand and weigh these risks before getting involved in deferred shares.
Related Entrepreneurship Terms
- Dividends: These are profits that a company shares among its shareholders, often as a form of motivation to keep them around. Deferred shares usually do not receive dividends.
- Preference Shares: These are a type of stock that gives shareholders the right to receive dividends before common shareholders. Deferred shares usually rank lower than these in dividends payment.
- Limited Liability: This refers to the type of liability where a company’s shareholders are legally responsible for the company’s debts only to the extent of the face value of their shares.
- Voting Rights: This is the right of shareholders to vote on corporate matters. Owners of Deferred shares usually do not have voting rights, except in very exceptional circumstances.
- Equity Capital: This is money that a business receives in exchange for giving a percentage of the business ownership to investors. Deferred shares are one of the types of equity capital.
Sources for More Information
- Investopedia: This is a comprehensive educational resource dedicated to finance and investing and it covers a wide range of topics including deferred shares.
- The Balance: It provides expertly crafted, comprehensive, easy-to-understand, practical information on a wide range of finance subjects including deferred shares.
- Financial Times: As a leading financial news organization, it provides news, analysis, and information about various measures in the world of finance which includes the concept of deferred shares.
- Corporate Finance Institute: Offers a wide range of resources for those looking to understand corporate finance topics, including deferred shares.
