There are three types of liquidation preferences: Participating preferred is generally the exception (about 20 percent of the deals today) — particularly in the initial (“Series A”) round of funding.
Preferred stock (also called preferred shares, preference shares or simply preferreds) is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.
The word “preference” flows from “preferred” and means the shares of the preferred stock will have a priority over (or ‘be treated better than,’ if you prefer) the common stock in the event of a liquidation., or is seeking to purchase shares in such a company from another party.In those circumstances, the transfer of the shares would be void absent the validation of the Grand Court of the Cayman Islands, as a result of section 99 of the Companies Law (Revised) (Section 99). When a winding up order has been made, any disposition of the company's property and any transfer of shares or alteration in the status of the company's members made after the commencement of the winding up is, unless the Court otherwise orders, void." Traditionally, applications for the Court's validation of the transfer of shares were made by issuing a Summons within the liquidation proceedings, but the applications were ordinarily dealt with by the Court administratively, without the need to attend a Court hearing, following the decision of the Honourable Chief Justice in , include provisions which expressly address the transfer of shares of companies in liquidation.Like bonds, preferred stocks are rated by the major credit-rating companies.The rating for preferreds is generally lower than for bonds because preferred dividends do not carry the same guarantees as interest payments from bonds and because preferred-stock holders' claims are junior to those of all creditors.Footnote 1In cases of companies which are in voluntary liquidation, a court application is not necessary, but any transfers of shares made after the commencement of the voluntary liquidation which are not sanctioned by the voluntary liquidator are void, as a result of section 125 of the Companies Law.