This excerpt taken from the C DEF 14A filed Jun 18, 2009.
Background and Reasons for the Dividend Blocker Amendment
On April 17, 2009, we announced that we intend to continue to pay full dividends on our preferred stock, including the Public Preferred Stock, through and until the closing of the Exchange Offers, at which point these dividends will be suspended. As previously announced, it is our intention not to pay common stock dividends during this period. When dividends on the Public Preferred Stock are suspended, we will be required to also suspend dividends on our common stock unless the Dividend Blocker Amendment has been approved.
The Dividend Blocker Amendment is integral to our goal of making Citigroup one of the best capitalized banks on a TCE and Tier 1 Common basis. The Dividend Blocker Amendment will permit the board greater flexibility in reinstating the common dividend without incurring additional dividend expense related to any Public Preferred Depositary Shares that remain outstanding after the settlement of the Exchange Offers. This would permit us to strengthen our common stock and significantly enhance our ability to maximize the efficiency of Citigroups capital structure going forward. The board believes that reinstating the common dividend is an important corporate objective, as it will make our common stock more attractive to a number of institutional investors, some of which are prohibited from investing in stock that does not pay a dividend. Making our common stock more attractive to these investors, as well as other investors who wish to realize returns on their investment through dividends, we believe will increase the price and liquidity of our common stock and strengthen our common stock as a long-term investment instrument. The Dividend Blocker Amendment permits this and at the same time saves the expense of paying dividends on any remaining Public Preferred Depositary Shares.
Under agreements previously entered into with the USG, Citigroup is not permitted to pay quarterly dividends in excess of $0.01 per share of common stock. While we have no current plans to reinstate the common dividend, we believe that payment of even a $0.01 dividend could potentially enhance the value of our common stock in the market. The annual cost of such a dividend, assuming consummation of all of the Transactions (including the USG/Private Holders Transactions and conversion of all Interim Securities into common stock)
would range from $7.6 million per quarter (if a reverse stock split of 30:1 is effected) to $229.5 million per quarter (if no reverse stock split is effected), assuming 100% participation in the Exchange Offers. However, if the Dividend Blocker Amendment is not approved, this cost would increase by the amount of dividends payable in respect of the Public Preferred Stock that remains outstanding after the Exchange Offers. The table below demonstrates the amount of dividends on Public Preferred Stock that would be payable annually assuming the stated levels of participation in the Exchange Offers if the Dividend Blocker Amendment is not approved. Potentially paying out such a large amount of preferred dividends would add significantly to the cost of a $0.01 common dividend and is inconsistent with our goal of strengthening TCE and Tier 1 Common.
A similar calculation was used for each of the other participation scenarios in the table above.
In addition, eliminating the clause in each certificate of designation of the Public Preferred Stock requiring that dividends be declared on a proportional basis with respect to all equally ranking series of preferred stock will also give us more flexibility in future financings involving preferred stock, as new series of preferred stock could be issued that give the holders thereof preferential rights to dividends. Preferred stock has historically been a component of our Tier 1 regulatory capital, which we believe remains an important measure of our financial strength. We think this additional flexibility to effect financings involving preferred stock is important to our ability to optimize our capital structure going forward.
We believe that a large majority of the holders of Public Preferred Depositary Shares will find the economic terms of the applicable Exchange Offer attractive and will tender their securities. If, as we anticipate, more than two-thirds of the Public Preferred Depositary Shares are tendered in the Exchange Offers, and the Dividend Blocker Amendment is approved in accordance with the terms of the relevant certificate of designation and Delaware law, only a fraction of our current holders of Public Preferred Depositary Shares will be affected by this change in the terms of their securities.
To the extent that the Dividend Blocker Amendment provides further encouragement to holders to tender their Public Preferred Depositary Shares in the Exchange Offers, this is also positive for Citigroup, as greater participation in the Exchange Offers will lead to an improved capital structure by increasing our TCE and Tier 1 Common. We believe this will improve public and market perception of our financial strength.