Advanced Diploma of Financial Planning (ADFP) Practice Test

Which right do shareholders have in case of liquidation?

1. Right to liquidation preferences

2. Right to vote out the board of directors

3. Right to distribution of assets

4. Right to redeem shares at book value

The correct answer is: Right to distribution of assets

In the event of liquidation, shareholders possess the right to distribution of assets. This right comes into play when a company is dissolving and its assets are being sold off or distributed. Shareholders are entitled to receive their proportionate share of any remaining assets after all liabilities, debts, and obligations have been settled. This distribution reflects each shareholder's ownership stake in the company. Liquidation preferences are often associated with preferred shareholders, who might have specific terms detailing their entitlement before common shareholders receive anything. Voting rights pertain more to corporate governance and decision-making processes rather than the liquidation process itself. The right to redeem shares at book value may apply under certain conditions but is not typically a guaranteed right during liquidation. Thus, the most accurate answer regarding shareholders' rights in liquidation is the right to distribution of assets.