Holders of cumulative preference shares in a Public Limited Company (PLC) are legally entitled to have unpaid dividend arrears settled from future corporate profits before any dividend distribution is made to ordinary shareholders.
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Answer
The statement is TRUE. Cumulative preference shares grant holders a prior claim on dividend arrears, requiring the company to settle all unpaid accumulated dividends from future profits prior to paying dividends to ordinary shareholders.
Cumulative preference shares entitle their holders to receive any passed or unpaid fixed dividends in subsequent years. A Public Limited Company cannot distribute dividends to ordinary (equity) shareholders until all arrears owed to cumulative preference shareholders have been fully discharged.
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Dividend Rights of Cumulative Preference Shareholders in Public Limited Companies