The “Unhappy Lot”: Limits on preferred stock protective provisions

“The lot of a holder of junior preferred stock is not always a happy one,”observed the Delaware Chancery Court in Benchmark Capital Partners IV, L.P. v. Vague. It certainly wasn’t for Benchmark Capital Partners. Benchmark’s fate holds important lessons for institutions and funds that invest in preferred stock. Preferred stock investors typically seek voting rights or veto rights over certain significant corporate actions and against direct economic impairment of the preferred stock investment. The Benchmark case illustrates some limitations of such traditional preferred stock protective provisions. Examining these limitations illustrates several ways that investors may help limit impairment of their preferred stock investments.