Non-participating shares, similar in nature to non-participating preferred stock, refer to a type of stock that entitles the shareholder to a fixed dividend, and nothing more. These shareholders do not have the right to participate in the extra earnings or dividends beyond the fixed dividend rate specified.
If a company declares dividends, non-participating shareholders receive their fixed dividends first, before any dividends are paid to the common shareholders. However, if the company generates surplus earnings and decides to distribute additional dividends, non-participating shareholders do not receive any portion of these extra dividends, which are then distributed to the common shareholders.
In the case of company liquidation, non-participating shareholders have a higher claim on assets and earnings than the common shareholders. However, their claim is limited to the par value of their shares plus any unpaid dividends, and they do not participate in any surplus assets that might be distributed among common shareholders.
This contrasts with participating shares, where shareholders receive their fixed dividends and also participate in the surplus earnings or dividends, along with common shareholders. They also have the right to participate in the distribution of remaining assets after liquidation, beyond the par value of their shares and unpaid dividends.
Please note that the terms and conditions associated with different types of shares can vary based on a company’s specific corporate charter, so it’s always important to understand the exact rights and restrictions of any particular stock issuance.
Example of Non-Participating Shares
Let’s consider a hypothetical company, MedTech Ltd., which has issued both non-participating and common shares.
After distributing dividends to the non-participating shareholders, the remaining dividends ($100,000 – $40,000 = $60,000) would then be available for the common shareholders. Therefore, each common share receives a dividend of $0.30 ($60,000 / 200,000 shares).
Now, let’s imagine MedTech has an exceptionally profitable year and decides to distribute an additional $20,000 in dividends. The non-participating shareholders would not be entitled to any part of this extra distribution. The additional dividends would be distributed only among the common shareholders.
In the event of MedTech’s liquidation, non-participating shareholders would receive their par value ($20 per share) plus any unpaid dividends before any distribution is made to the common shareholders. However, they wouldn’t share in any remaining assets after that, which would go to common shareholders.
This example illustrates the fundamental attributes of non-participating shares: they provide a fixed dividend and priority in liquidation, but they do not allow holders to participate in additional profits or surplus assets.