What are Non-Participating Shares?

Non-participating shares do not provide their holders with a share of the earnings of the issuing entity. Instead, these shares typically provide a fixed rate of return in the form of a dividend, and so are designated as preferred shares.

Advantages of Non-Participating Shares

Here are some of the advantages of non-participating shares, from the perspectives of the investors holding these shares and the companies issuing them:

Advantages for Investors

Fixed dividends. Non-participating shares provide investors with a steady, predictable income stream because they are entitled to fixed dividends regardless of company performance beyond a certain point.
Priority in payout. In the event of liquidation, non-participating preferred shareholders are paid out before common shareholders. Although they don’t share in additional profits, they have a higher claim on assets, which reduces their risk relative to common shareholders.
Reduced exposure to company performance. Since dividends are fixed, non-participating shareholders are less affected by fluctuations in company profitability. This can be beneficial for risk-averse investors who prefer stability over potential upside.
Predictable investment terms. The structure of non-participating shares is straightforward, making it easier for investors to understand their returns and rights. This clarity is helpful for investors seeking specific risk/reward profiles.

Advantages for Issuers

Easier profit retention. Non-participating shares allow companies to retain more of their profits, as they aren’t required to pay additional dividends if profits exceed a certain threshold. This can help the company reinvest in growth or expansion.
Attractive to conservative investors. By offering fixed dividends, companies can attract conservative investors who seek predictable returns.
Reduced pressure on profit distribution. Since non-participating shareholders do not claim additional profits beyond their fixed dividends, companies face less pressure to maintain high payouts, which can reduce the financial burden during less profitable periods.
Flexibility in financial planning. Non-participating shares allow the company to manage its cash flow better, as management can plan for fixed dividend payments without the need to reserve additional funds for profit-sharing with these shareholders.
Favorable terms in raising capital. Non-participating shares often make it easier to raise capital, especially if the company is in early stages or needs funds without giving up too much control or paying high dividends.

Disadvantages of Non-Participating Shares

In exchange for the reduced level of risk, owners of non-participating shares do not participate in the earnings of the issuer, which caps their maximum return. This may represent a substantial amount of lost income if the business turns out to be highly profitable.