2. Issuance of Stock Flashcards
What is an issuance?
of stock v. of bond
Issuance of stock occurs when a corporation sells its own stock. Doesn’t apply when individuals sell stock.
NOTE: an issuance of stock creates an equity insurance and the investor who has bought stock becomes an owner of the corporation. An issuance of bonds creates a debt security and the investor who has made a loan becomes a creditor.
What is a subscription?
A subscription is a written, signed offer to buy stock from a corporation
When is a subscription revocable?
PRE-incorporation subscriptions: are irrevocable by purchasers for three months unless the subscription provides otherwise OR all subscribers agree to let you revoke
POST-incorporation subscriptions: are revocable up until the corporation accepts the subscription offer (when the board of directors accepts the offer)
Can a corporation decide to sell only to some subscribers and not others?
No, it must be uniform within each class or series of stocks
What happens if a purchaser/subscriber defaults on payment?
If…
- He pays less than half of the purchase price and fails to pay the rest within 30 days of WRITTEN demand, the corporation can keep the money AND cancel the shares (it becomes authorized and unissued so corp can sell it)
- He pays half or more and fails to pay rest within 30 days of demand, the corporation must TRY to sell the stock to someone else for cash (or binding obligation to pay cash). But if no one buys, the corporation can keep the money AND cancel the shares (it becomes authorized and unissued so corp can sell it)
- If new subscriber pays more than the remaining balance, the defaulting subscriber recovers the excess (less expenses to resell)
What are the five permitted forms of consideration for stock issuance?
(ALWAYS DO FORM BEFORE AMOUNT)
- money (cash or check)
- tangible or intangible property
- services already performed for the corporation (including services in forming corporation)
- binding obligation to pay money or property in the future (i.e. a promissory note)
- binding obligation to perform future services having an agreed value
What is unpaid stock?
It’s when stock is issued for no consideration and is treated as “watered stock”
What are the different amounts of consideration do issuance price for a series of stock?
(ALWAYS DO FORM BEFORE AMOUNT)
Par: minimum issuance price
No par: no minimum issuance price. So price is determined by the board of directors and valid if made without fraud (wasting corporate assets) unless the certificate lets shareholders do it (unlikely)
Treasury stock: treated as having “no par” on resale (i.e. can sell treasury shares for ANY price)
Can a corporation acquire property by issuing par stock?
Yes, as long as the form is worth at least the par value of the stock issued. This is based on a board of directors’ good faith determination.
What is “watered stock”?
consequences and liability
Stock that is issued for less than the par value and the consequences are that:
(a) the corporation can sue for the “water” amount (difference between what was sold and par value)
(i) The directors are liable if they “knowingly authorized” the issuance
(ii) The direct purchaseris liable (without a defense)
(iii) A third party purchaser from a direct purchaser is not liable if she acted in good faith (i.e. BFP that does not know about the water)
What are pre-emptive rights?
limitations
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a NEW issuance for MONEY
NOTE: The right exists only if such rights are listed in the certificate. If certificate is silent then no right.
NOTE: New issuance does not include the sale of shares authorized by the original certificate AND sold within two years of incorporation unless certificate says otherwise
NOTE: New issuance does not include the sale of treasury stock unless the certificate says it does
When are stock transfer restrictions valid?
When they are “NOT an undue restraint on alienation” OK: req’ing a sale of one’s stock to the corp once a SH dies
NOT OK: req'ing approval of the corp to sell stk Any restriction MUST be in CERTIFICATE, BYLAWS or by AGMT To be enforced against transferee, MUST (i) be conspicuously noted on the stock cert.;OR (ii) transferee has knowledge of restriction
When do SHs have a right to a stock distribution?
When the BOD declares it in its DISCRETION Stock distribution = (i) dividend; (ii) pmt for repurchases; OR (iii) pmt for redemption
A ct will interfere w/ a BOD's discretion ONLY IF there is a showing of bad faith or dishonest purpose (high hurdle to cross) The BOD can't declare if the company is insolvent (or the distribution would render the company insolvent)
In what order are stock dividends paid?
FIRST: Preferred SHs→get dividends before common “Participating”: means the preferred SHs get paid 2X: once as preferred SHs and second as part of common pool
"Cumulative": means if there are arrears, the past due amts will be paid in FULL before common get pmt (relevant when BOD doesn't declare a dividend) SECOND: Common SHs→get paid after preferred shs
Which funds may be used for distributions to SHs?
From “surplus” ONLY: APIC + Retained Earnings Surplus = Assets – liabilities – stated capital (par value of stock)
NEVER from stated capital (par value of stock) If there is no-par issuance, the BOD can allocate any part (BUT not all) to surplus w/in 60 days of issuance
