In liquidation, do preferred shareholders have an earlier claim on assets than common shareholders?

In liquidation, do preferred shareholders have an earlier claim on assets than common shareholders?

• A. True
• B. False
• C. Only for voting rights
• D. They have the same priority

Answer: (B)

In liquidation, payouts follow a priority waterfall. After settling all debts and other creditors, preferred shareholders receive the amount specified by their liquidation preference before any funds go to common shareholders. Only the remaining assets, if any, go to common stockholders. This means preferred shareholders do have an earlier claim on assets than common shareholders, subject to the available assets and the size of the liquidation preference. If assets are insufficient to cover all claims, creditors are paid first, then preferred, then common. For example, if there are $1 million in assets and a $600k total liquidation preference for preferred, those preferences are satisfied before any distribution to common, and any leftover would go to common if there were more assets.

In liquidation, payouts follow a priority waterfall. After settling all debts and other creditors, preferred shareholders receive the amount specified by their liquidation preference before any funds go to common shareholders. Only the remaining assets, if any, go to common stockholders. This means preferred shareholders do have an earlier claim on assets than common shareholders, subject to the available assets and the size of the liquidation preference. If assets are insufficient to cover all claims, creditors are paid first, then preferred, then common. For example, if there are $1 million in assets and a $600k total liquidation preference for preferred, those preferences are satisfied before any distribution to common, and any leftover would go to common if there were more assets.