Blank Check Preferred Stock
What it is:
How it works/Example:
The most common reason a company will issue blank check preferred stock is to create a "poison pill" whereby the rights associated with the stock make a takeover unattractive.
In order to issue this type of stock, a company will normally have to amend its articles of incorporation Then the board of directors will issue the shares, using its power over the voting, conversion, dividends, and other rights to create a share class that meets its needs.
For example, the board of Company XYZ may issue a blank check preferred stock that can be converted to common shares if a working capital is proposed, creating a higher expense for the company to be bought.
Why it matters:
Blank check preferred stock can act as a safety mechanism from unwanted takeovers. As well, companies can use the blank check preferred stock to quickly raise capital without awaiting shareholder approval. However, given the powers that must be entrusted to the board of directors in order to issue the shares, investors should carefully monitor when and for what reason blank check preferred shares are issued.