Chapter 2: Stock and Other Corporate Securities Flashcards
Stock
represents control of the corp and residual interest that stockholders are paid.
Preferred stockholders are paid before common stockholders.
Must have at least once class of stock w/ voting rights and one with residual economic rights upon liquidation
Debt holders
Creditors take precedence over payments to shareholders.
Senior creditors are paid before junior creditors.
Payment waterfall
Senior creditors
Junior creditors
Preferred stockholders
Common stockholders
How are shares issued?
Board of directors decides to issue shares
Board of directors determination of right price to sell is conclusive proof and cannot be changed
Can’t issue more than authorized in articles of inc.
Authorized shares
Maximum # of shares a corp can issue
Issued and outstanding shares
Number of shares that have been issued and have not been redeemed or repurchased.
Interest in corp. is relative to # of shares person holds over total # of shares outstanding.
Par-value stock
Stated min value that shares would be sold for, discretionary in NC.
Stock-subscriptions
Agreements to buy stock, in NC irrevocable for 6 months, if failure to buy, can sue for purchase price or sell stock to someone else.
Dilution
Interest of shareholder is diluted when the corp sells more shares, to prevent this, shareholders can negotiate for preeemptive rights.
Allows existing shareholder to purchase additioanl shares to keep their status quo percentage interest in corp constant
In NC, corp formed after 1990 preemptive rights are not mandatory; must be set forth in articles of inc.
Payment of Dividends
Payment of dividends is authorized by Board of Directors, generally discretionary. Unless:
Decision not to pay is in bad faith or
NC allows a shareholder of a close corp to compel dividends if: 25 or less shareholders, corp must pay 1/3 of the profits for the prior period, a 20% or more shareholder may sue to compel. If conditions met must pay 1/3 of net profits or redeem the complaining shareholders shares for FMV.
Corp can show that the payment of dividends would be more than 50% of the current periods net profits, the profits recoup prior losses, the payment would breach a loan agreement, or there are bona fide business reasons that cause the corp to retain the funds to avoid payment of dividends.
Relevant dates to declare dividends
Declaration date: date the board declares the corp will pay dividends
Record date: the date on which the shareholder has to be the owner to get the dividends
The payment date: when dividends are actually paid
Tests for ability to pay dividends
Cannot pay dividends if payment will make the corp insolvent. 2 tests:
corp can’t pay its debts in the ordinary course of business
The dividend would make the corp liabilities greater than its assets after the dividend
Insolvency determined on the declaration date
If dividend is corporate note, insolvency is tested on the distribution date
If an unlawful dividend is paid, the directors are jointly and severally liable: may seek contribution from other directors and from the shareholders who received unlawful distributions
Dividend Distributions
Dividends are paid pro rata to owners of shares on the record date set by the board; if no date specified, the record date is presumed to be the declaration date
Dividends are paid on the shares issued and outstanding
Shares reacquired by a corporation
Do not count unauthorized shares: ex
100 shares authorized, 75 outstanding and reacquires 25, there are 50 shares outstanding and the corp may issue another 50 under the default rule.
General rule for sale of stock
Generally shareholder is free to sell his stock to anyone at any price, unless there are contractual restrictions or restrictions under securities law.
