Consider Form S-3 Eligibility if Preferred Dividends are Delayed

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Some issuers have suspended dividend payments on outstanding preferred stock as a result of COVID-19 pandemic-related economic concerns. In order to remain eligible to use a Form S-3 registration statement, among other requirements, neither the issuer nor any of its consolidated or unconsolidated subsidiaries shall have failed to pay any dividend on its preferred stock since the end of the last fiscal year for which audited financial statements are included in the registration statement (General Instruction I.A.4 of Form S-3). The reference to materiality in the instruction does not apply to the failure to declare dividends on preferred stock. However, if an issuer’s board of directors does not declare a dividend on non-cumulative preferred stock, the issuer is not disqualified from using Form S-3 since no liability to pay the dividend arises under the terms of the non-cumulative preferred stock. Conversely, a declared but unpaid dividend on preferred stock would disqualify the issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. The issuer also would be disqualified from using Form S-3 even if it has a history of cumulating such dividends for three quarters before paying them at the end of each year. However, if the cumulative preferred stock was issued as part of a trust preferred financing and the terms of the underlying debt permit the issuer to defer interest payments for a specific time period and such deferral is not considered a default under the financing then the issuer may correspondingly defer the accrued dividend payment on the cumulative preferred stock without losing its eligibility to use Form S-3. Nonetheless, if an accrued and unpaid dividend does disqualify an issuer from use of Form S-3, the issuer can satisfy the eligibility requirement in the following fiscal year even if the dividends have not been paid provided that the issuer files a Form 10-K with audited financial statements covering the period in which the failure to pay preferred dividends occurred. If, after the end of the fiscal year, the issuer has a new failure to pay dividends on preferred stock, then the issuer would not be eligible to use Form S-3 until the filing of its next Form 10-K. Even if a dividend payment on cumulative preferred stock was missed, an issuer may continue to use an already effective Form S-3 registration statement so long as there is no need to update the registration statement.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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