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Liquidation Rights

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Liquidation rights
The rights of a firm's securityholders in the event the firm liquidates.
Liquidation Right
The right of certain stakeholders in a firm to receive the proceeds of the firm's liquidation. Liquidation rights vary according to a hierarchy; that is, interested parties higher in the hierarchy have the right to receive all their proceeds before those lower in the hierarchy. Generally speaking, secured creditors have the highest liquidation rights, followed by general creditors, preferred stockholders, and, finally, common stockholders. See also: Bankruptcy.
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An obligation (whether or not designated as debt) generally will be treated as a second class of stock if (1) it constitutes equity or otherwise results in the holder's being treated as a shareholder under general tax law and (2) a principal purpose of the obligation is to circumvent the distribution or liquidation rights conferred by the outstanding stock or to circumvent the maximum shareholder limitation (Regs.
Avoiding S corporation debt obligations that are a second class of ... by Ellentuck, Albert B. / The Tax Adviser
For example, if the organizer of a new business plans to raise equity capital that provides a fixed rate of return and limited liquidation rights, an S corporation would not he appropriate.
The choice-of-entity maze: tax and nontax issues make for complicated ... by Porcaro, Gregory A. / Journal of Accountancy
Fourth, voting rights, board rights, and liquidation rights are allocated such that if the company performs poorly, the VCs obtain full control.
Venture capitalists as economic principals by Kaplan, Steven N.; Stromberg, Per / NBER Reporter
 
 
 
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