Blank Check Preferred Stock

Blank check preferred stock is a method companies use to simplify the process of creating new classes of preferred stock to raise additional funds from sophisticated investors without obtaining separate shareholder approval.

To do this, a company must amend its articles of incorporation to create a class of unissued shares of preferred stock whose terms and conditions may be expressly determined by the company's board of directors.

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 (poison pill).

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.

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.