Distressed companies with large tranches of preference shares in issue are particularly vulnerable to greenmail, mainly because of the voting power wielded by holders of this class of stock.
Preference shareholders are granted voting rights at all shareholder meetings once dividends are more than six months in arrears. Moreover, failure to pay dividends on some classes of preference stock enables the holder to convert into ordinary shares.
This prompted the Steinhart fund to buy 30 per cent of Ransomes' preference shares earlier this month.
If Wembley fails to pay its preference dividend, due in July, holders can convert each share of pounds 1 par value into 3.3 ordinary. With Wembley's ordinary at 12p and the preference at 42p, the door to cheap votes is already ajar.
Wembley's financial position is serious. In a circular asking shareholders to rectify a breach of borrowing powers Sir Brian Wolfson, chairman, warned that the proposed change was essential for the company to be able to continue trading.
A refinancing looks inevitable and holders of preference stock, and particularly those with enhanced voting power, would be in a commanding position.