Corporations - Issuance of Stock Flashcards
Types of Securities in a Corp
The corp issues a security (investment, in the form of stock) to investors.
DEBT SECURITIES
When the corp borrows money, it issues a debt security, which is usually called a bond. The bond is a promise that the corp will repay the loan with interest. If the loan is unsecured, it may be called a debenture. Holders of debt securities are NOT owners of the corp.
EQUITY SECURITIES
When an investor buys an ownership in the corp, it buys equity securities, aka stock (shares of stock). The money invested doesn’t create a debt, but rather, creates equity and ownership power in the corp.
Issuance of Stock
An issuance of stock is when a corp sells its own stock.
Subscriptions
Subscriptions are written offers to buy stock from a corp. A common issue is whether such a subscription offer may be revoked.
PREINCORPORATION SUBSCRIPTION - under the MBCA, preincorporation subscriptions are irrevocable for 6 months unless otherwise provided in the terms of the subscription agreement or unless all subscribers consent to revocation.
When is payment due for a subscription? Payment is due upon demand of the board. Demand may not be made in a discriminatory manner. A subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid on the subscription at the corporation’s option.
POSTINCORPORATION SUBSCRIPTION
These are REVOCABLE until accepted by the corp.
Consideration for Stock
Stock may be issued for any tangible or intangible property or benefit to the corporation.
Split of authority: PROMISSORY NOTES and FUTURE SERVICES in some states work as consideration but in others are prohibited, meaning that trying to pay for stock with these things results in “unpaid stock” meaning it’s treated as watered stock. They are acceptable under the MBCA.
Amount of Consideration
Traditional Value - Par
Par means minimum issuance price. Traditionally, stock could not be issued by a corp for less than the stock’s stated par value, and the consideration received for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares.
WATERED STOCK
If you’re given par stock, watch for watered stock, which can occur when par value stock is issued for less than its par value.
MBCA Approach - Board Determines Value
The MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate. Consideration received for the issuance of stock need not be placed in any special account.
The board’s valuation is CONCLUSIVE if made in good faith.
Preemptive Rights
A preemptive right is the right of an existing shareholder of common stock to maintain their percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money (meaning cash or its equivalent, like a check). In some states, this “new issuance” includes the issuance of treasury stock, but in other states, it doesn’t.
The right must be stated in the articles. Shareholders don’t have a preemptive right under the MBCA unless the articles provide the right. If the articles are silent, we don’t have preemptive rights.
LIMITATIONS
Even if the articles do provide for a preemptive right, shareholders generally have no preemptive right in shares issued 1) for consideration other than cash 2) within 6 months after incorporation; or 3) without voting rights but having a distribution preference.
