What Is Blank Check Preferred Stock?
Blank check preferred stock is a method companies use to simplify the process of creating new classes of preferred stock and to raise additional funds from sophisticated investors without obtaining separate shareholder approval. In effect, a company's shareholders pre-approve the new class to be issued at some point in the future, and then the firm's Board of Directors (BoD) has broad discretion in when and how to issue them.
This kind of stock can also be created by a public company as a takeover defense in the event of a hostile bid for the company.
- Blank check preferred stock refers to shares of a class of a firm's preferred stock authorized by its Board of Directors, but without further stockholder action.
- Stockholder approval is initially required to authorize a class of blank check preferreds, but the Board thereafter has broad discretion to fix the terms of the issue.
- The preferred shares could be given special voting rights and/or be convertible to common stock, which is useful in a hostile takeover bid defense.
- An amendment to authorize or increase blank check preferred would require stockholder approval.
Understanding Blank Check Preferred Stock
There is a regulatory process needed to issue new shares by a company, especially a new class of shares. To do issue blank check preferred stock, a company must amend its articles of incorporation to create a new class of unissued shares of preferred stock whose terms and conditions may be expressly determined by the company's board of directors.
If a company wants to issue blank check preferred stock, it must include in its articles of incorporation the maximum number of shares of preferred stock that will be authorized and issued. The board of directors must also be given the direct authority for deciding on voting rights, preferences, and restrictions on such shares.
Blank check preferred stock can be structured to grant more voting power to the holders of said shares. For instance, they might receive “super voting power” where more than vote is granted per share. This can be from two votes to as many as 1,000 votes per share of blank check preferred stock.
Such an action would give a block of shareholders greater voting power in the company’s decisions, such as deciding on whether or not to reject a hostile bid for ownership. This also would give them the ability to exert more leverage than other shareholders. Blank check preferred stock may also be granted certain control rights as well as conversion rights that would further make it difficult for the company to be acquired by a hostile bidder.
Other Reasons to Issue a Blank Check Stock
There are other reasons why a company might issue this type of stock. It could be offered as a way to bring more capital into the company as well as an incentive to draw key investors or to be granted to potential hires or existing executives who are essential to the company. The shares themselves may be divided into several series of preferred stock that can each come with different terms. For instance, one series of such shares may carry additional voting powers while another series comes with special conversion rights that would be invoked in the event of a hostile bid.
When the blank check preferred stock is issued, the rights, voting powers, and other details regarding the shares will be detailed in an amendment to the company’s article of incorporation.
A company may also use blank check preferred stock as a poison pill to avert a hostile takeover.