Blank Check Preferred Stock – Definition

Cite this article as:"Blank Check Preferred Stock – Definition," in The Business Professor, updated June 8, 2019, last accessed August 12, 2020, https://thebusinessprofessor.com/lesson/blank-check-preferred-stock-definition/.

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Blank Check Preferred Stock Definition

Blank check preferred stock is an issuance method used by companies to raise additional funds. This method involves creating a new category of preference shares, otherwise known as preferred stock which are authorized by sophisticated investors without a separate shareholder approval.

Investors who contribute to the creation of new classes of preferred stock are often high net-worth investors usually board of directors of the company. These set of investors determine the voting rights, conversion and dividends of the newly created stock without the company going through the process of getting a separate shareholder approval.

A Little More on What is Blank Check Preferred Stock

Companies that use the blank check preferred stock method must adjust the formal documents binding the creation of the company in a way that will capture the creation of a new class of unissued stock. Contained in the adjusted articles of incorporation include the terms and conditions of the preferred stock which are determined by the company’s sophisticated investors or board of directors. The number of shares if the preferred stock that will be issued, the dividends of the stock as well as the conversion rates of the shares must be included in the articles of incorporation.

The  blank check preferred stock method can also be used by a publicly traded company as a defense mechanism for hostile takeovers.

Usually, the issuance of blank check preferred stock grant greater voting power to the holders of the shares, especially when it comes to taking certain decisions in a company. They have control rights, conversion and greater advantage when compared to other shareholders. For instance, this super voting power can be exercised by holders in determining whether or not to allow a hostile bid for the ownership of the company.

Aside that blank check preferred stock is used as a defense mechanism for hostile bidding, companies also use this method to raise additional funds. Preferred shares or stock can also be in different categories with different terms and conditions.

References for Blank Check Preferred Stock

Academic Research on Blank Check Preferred Stock

Corporate governance and firm operating performance, Brown, L. D., & Caylor, M. L. (2009). Review of quantitative finance and accounting, 32(2), 129-144.

The influence of institutions on corporate governance through private negotiations: Evidence from TIAA‐CREF, Carleton, W. T., Nelson, J. M., & Weisbach, M. S. (1998). The Journal of Finance, 53(4), 1335-1362.

The role of asset structure, ownership structure, and takeover defenses in determining acquisition likelihood, Ambrose, B. W., & Megginson, W. L. (1992). Journal of Financial and Quantitative Analysis, 27(4), 575-589.

On the uses of corporate governance provisions, Danielson, M. G., & Karpoff, J. M. (1998). Journal of Corporate Finance, 4(4), 347-371.

Governance mechanisms and equity prices, Cremers, K. M., & Nair, V. B. (2005). The Journal of Finance, 60(6), 2859-2894.

The impact of shareholder activism on target companies: A survey of empirical findings, Karpoff, J. M. (2001).

Corporate governance and firm performance, Brown, L. D., & Caylor, M. L. (2004).

An empirical analysis of corporate takeover defences and earnings management: evidence from the US, Jiraporn, P. (2005). Applied Financial Economics, 15(5), 293-303.

Corporate Devices for Diluting Stock Participations, Berle Jr, A. A. (1931). Colum. L. Rev., 31, 1239.

Corporate governance and firm performance: An exploratory analysis, Shaheen, R., & Nishat, M. (2005, June). In Conference of Lahore School of Management Sciences, Lahore.

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