Capitalization

Question 1

Subscription Agreement

Answer 1

Defn: written offer to buy stock from corp before it is formed

Question 2

Subscription Agreement: Revocation

Answer 2

• Old rule: freely revocable as continuing offers
• Modern rule: pre-incorp offers IRREVOCABLE for a designated period (usually 6 months), unless otherwise provided
• post-incorp subscriptions: freely revocable until acceptance (board accepts)

Question 3

Consideration for Stock: Issue

Answer 3

what qualifies as valid consideration for shares?

Question 4

Consideration for Stock: Form (ways shares can be purchased)

Answer 4

BLL: under the modern majority rule, shares may be paid for with ANY tangible or intangible property or benefit to the corporation (expands what is acceptable consideration)

Question 5

Consideration for Stock: Valid Forms

Answer 5

• money paid
• labor done
• property acquired
• secured promissory note
• cancellation of corp debt

formerly invalid, but now valid:

• contracts for future services
• unsecured promissory notes
• promise to convey future property

Question 6

Consideration for Stock: Amount

Answer 6

BLL: corp MUST receive FULL VALUE for its stock

Question 7

Consideration for Stock: Amount: Kinds

Answer 7

Par - minimum issuance price

No par - no minimum issuance price (stated value = value set by Board for no par)

Treasury stock - previously issued; has been re-acquired (treat as no par)

Question 8

Consideration for Stock: Watered Stock

Answer 8

• Par value shares sold for less than par, so corp did not receive full value
  e. g. payment of property/service overvalued

Question 9

Watered Stock (hypo)

Answer 9

Corp issues 25K worth of stock to D in exchange for swamp land valued at $10,000

• corp can recover 15K from directors if they knowingly issued stock; OR
• corp can recover 15K from D

*BFP has no liability: corp and D still liable

Question 10

Pre-emptive Rights

Answer 10

Defn: Right of an existing shareholder to maintain her percent ownership of stock when new stock issued for money

Question 11

Pre-emptive Rights: notes

Answer 11

• CL rule recognizes such rights as matter of law; however, modern majority rule allows corps to “opt out” if expressly stated in articles
• sale of treasury stock not subject to pre-emptive rights; must be new issuance for money