Legal Definitions - cumulative preference share

A cumulative preference share is a type of ownership interest in a company that entitles its holder to receive fixed dividend payments. The "cumulative" aspect means that if the company fails to pay these dividends in any given period, the missed payments accumulate and must be paid in full to the cumulative preference shareholders before any dividends can be paid to common shareholders in subsequent periods. This feature provides an added layer of security for investors, ensuring that their dividend entitlements are not lost even if the company faces temporary financial difficulties.

• Example 1: Temporary Financial Strain

  Imagine "TechInnovate Inc." has issued cumulative preference shares with an annual dividend of $5 per share. In 2023, due to unexpected supply chain disruptions, the company experiences a temporary dip in profits and decides not to pay any dividends to its shareholders.

  How it illustrates the term: Because the shares are cumulative, the $5 dividend for 2023 is not lost. It accumulates. In 2024, if TechInnovate Inc. recovers and wants to pay dividends, it must first pay the $5 accumulated dividend from 2023 plus the $5 dividend for 2024 (a total of $10 per cumulative preference share) before any common shareholders can receive a dividend.

• Example 2: Startup Growth Phase

  "GreenEnergy Solutions," a new renewable energy startup, has issued cumulative preference shares to early investors, promising a 6% annual dividend. For its first two years (Year 1 and Year 2), the company reinvests all its profits back into expansion and does not pay any dividends to any shareholders.

  How it illustrates the term: The 6% annual dividend for Year 1 and Year 2 accumulates. By the end of Year 2, GreenEnergy Solutions owes 12% of the preference share's par value in accumulated dividends. When the company becomes profitable enough in Year 3 to distribute earnings, it must first pay the 12% accumulated dividends from Year 1 and Year 2, plus the 6% dividend for Year 3 (a total of 18% for that year), to its cumulative preference shareholders before any common shareholders can receive any distribution.

• Example 3: Strategic Reinvestment

  "Global Logistics Corp." is a well-established company with cumulative preference shares. In 2025, the board decides to undertake a major infrastructure upgrade, requiring significant capital. To fund this, they temporarily suspend dividend payments to all shareholders, including preference shareholders, for that year.

  How it illustrates the term: The dividend payment for 2025, which was due to cumulative preference shareholders, does not disappear. It becomes an arrear. If Global Logistics Corp. wishes to pay dividends in 2026 or any subsequent year, it must first settle the missed 2025 dividend payment, along with any current year's preference dividend, before common shareholders can receive any distribution. This ensures that preference shareholders are prioritized even when the company makes strategic decisions that impact short-term cash flow.