What is the primary claim of preferred shares in the event of liquidation?

Preferred shares primarily have a claim after creditors have been satisfied but before any distributions are made to common shareholders in the event of liquidation. This hierarchy is essential in understanding capital structure: creditors, who have lent money to the company, are prioritized to recover their investments first, as they have a legal stake in the company’s obligated payments. Following creditors, preferred shareholders receive their claim on the remaining assets, which can include any unpaid dividends owed to them. Only after preferred shareholders are compensated do the common shareholders receive any remaining assets. This structure ensures that preferred shareholders are somewhat insulated from the company’s risk, providing them with a more favorable position than common shareholders, who stand last in line.