From the April 2009 issue of the CDx3 Newsletter (free, what's this?)
Every CDx3 Preferred Stock has a five year life span between its introduction (the "IPO date") and its "call date" when the issuing company regains the right to buy your shares back from you. If they do so ("call" your shares), they must pay you $25 per share.
What Jim is wondering is whether the issuing company can sneak around having to pay you $25 per share by going out to the open market, where the market prices are currently lower than $25 per share, and buy up the shares there on the cheap (and cheating you out of the higher $25 price).
There is nothing stopping an issuing company from purchasing its own preferred stocks on the open market but that has nothing to do with a “call.”
When purchasing preferred stock shares on the open market there has to be an agreeable buyer and an agreeable seller – it takes both. If a seller prefers to hold onto their shares until a future call they cannot be forced to sell their shares to the issuing company (or to anyone else). The only way the issuing company can compel a shareholder to sell their shares back to the issuing company is via a call (in the case of CDx3 Preferred Stocks).
“Convertible preferred stocks” however work differently. In the case of convertible preferred stocks the issuing company can compel shareholders to convert their shares to common stock under the terms of the prospectus. This is what we saw Citigroup do with three of their preferred stocks in late February (see related article below). This is why the CDx3 Selection Criteria exclude convertible preferred stocks.
