Deferred shares are issued to key individuals in a company, but cannot be redeemed while employed. They offer larger dividends, but cannot be participated in once employment is terminated. In liquidation or bankruptcy, obligations are fulfilled before shareholders receive compensation. This strategy is not commonly used today.
Deferred shares are a form of shares that are sometimes issued to key individuals within the issuing company. Typically, company officers or directors are eligible to receive these shares. As part of a deferred stock issuance, holders of the shares cannot redeem the shares while they are employed by the company.
Because a deferred stock strategy involves issuing shares that are essentially locked from active trading by the recipients, they tend to provide larger dividend payments than common stock or preferred stock. In the event that the company does well, the dividends can generate considerable savings for the employee. However, it is not possible to participate in a deferred action program once employment is terminated for any reason. When the employee is no longer with the company, the shares are converted to preferred or common stock at the current market value.
Another important aspect of a deferred stock stock program has to do with when shares are honored in the event of a company’s liquidation or bankruptcy. All obligations must be fulfilled before the shareholder sees any return in the share account. This means that not only will creditors be paid first, but investors holding preferred shares or common shares will be paid before the deferring shareholder receives any compensation.
In times past, a deferred action did not really represent an action in the usual sense. Instead, the share was more akin to an accounting entry. A certain amount is credited to an employee deferred account for each pay period, and the balance is subject to the performance of common and preferred shares issued by the company. From time to time, dividends were also applied to the balance. When the employee left the company, the account balance was converted into real shares or cashed out and sent to the former employee.
Today, this strategy is not used as often as it was in the past. More commonly, companies provide executives and other key employees the opportunity to participate in participation plans that revolve around preferred stock options. Still, the deferred share plan structure is a viable option for a retirement program and can work very well for smaller companies.
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