Corporations - ISSUANCE OF STOCK, subscriptions, consideration, water, pre-emptive rights Flashcards
What is an “issuance” ?
Issuance of stock occurs when a corporation sells its own stock (way of raising capital)
Issuance of stock is one way a corporation can raise capital. Investors buy stock and thereby become holders of an “Equity Security.” They are then owners of the corporation. Their equity interest brings with it various rights.
it is NOT an issuance when a third party sells stock of the company
- e.g. MAyberry realty corp. sells 10k shares, this is an issuance
- but if Peter sells 3,000 shares of mayberry, NOT an issuance bc corporation is not selling its own shares
stock as distinguished from bonds which are a debt instrument (ie investor is making a loan to the corporation, to be repaid (usually with interest) as agreed in the contract. The holder of the bond is a CREDITOR (not an owners) of the corporation and holds a “debt security”
What is a DEBENTURE?
A DEBENTURE is an unsecured bond
What is a SUBSCRIPTION?
SUBSCRIPTIONS
A SUBSCRIPTION is a written, signed offer to buy stock from the corporation
Can you revoke a pre-incorporation SUBSCRIPTION?
SUBSCRIPTIONS
No, is irrevocable for 3 months UNLESS
(i) the subscription provides otherwise OR
(ii) all other subscribers consent to revocation .
(companies need to be able to rely on having capital once it is committed)
e.g. Jan 10, S signs a subscription offering to buy 100 shares of C. Corp., a corporation not yet formed. A week later S changes his mind, can he revoke? NO, not for 3 months
Are POST-incorporation SUBSCRIPTIONS revocable?
SUBSCRIPTIONS
YES, until accepted by the corporation
when is a subscription ACCEPTED (ie when does the corporation and the subscriber become obligated under the subscription)? – when the BOARD ACCEPTS the OFFER
Can a corporation decide to sell only to some subscribers and not to others?
(SUBSCRIPTIONS)
NO, it must be uniform with each class or series of stock
i.e. if 5 subscribers for a class of stock, must treat them uniformly, can’t accept some and deny others
PENALTIES OF DEFAULT - If the corporation accepts the offer and the subscriber defaults on payment, what happens?
(SUBSCRIPTIONS)
If subscriber defaults on payment, the corporation may proceed as provided in the subscription agreement, or as it would in collecting any other debt
2 situations
(1) If he (the SUBSCRIBER) PAID 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 paid and cancel the shares - the stock then becomes authorized and unissued (i.e. the corporation can re-sell it)
(2) If the SUBSCRIBER HAS PAID HALF OR MORE, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash (or a binding obligation to pay in cash) - the delinquent subscriber gets any proceeds in excess of the amount due the corporation plus selling expenses. If no one makes a sufficient offer (ie no one will pay the remaining balance) the shares can be canceled (and subsequently re-issued) and all previous payments FORFEITED to the corporation (aka same situation as above)
Forms of Consideration - What must a corporation receive when it issues stock?
5 permitted forms of CONSIDERATION for an issuance:
(1) MONEY - cash or check
(2) tangible or Intangible PROPERTY
(3) SERVICES already performed for the corporation
(4) A BINDING OBLIGATION to pay money or property in the future (e.g. a promissory note)
(5) A BINDING OBLIGATION to perform FUTURE SERVICES having an AGREED VALUE
Anything other than these 5 forms are PROHIBITED forms of consideration
-if corp issued stock for NO consideration - it is called “UNPAID” STOCK and is treated like “WATER”
Note: a corporation may issue stock to somebody for performing services in forming the corporation (#3 above)
What does “par value” mean?
AMOUNT OF CONSIDERATION
it is the minimum issuance price for a stock
i.e. if stock has par value of $3 and the company issues 10,000 shares, the least they can accept is $30,000 for the issuance (fine to sell for more, just can’t sell for less)
No par stock
means there is no minimum issuance price so can sell for any price
Who sets the price at which to sell no par stock?
–the board, unless the certificate lets the shareholders do it
NOTE: so if certificate is silent, board does it (this will normally be the case on the BAR)
Treasury Stock
TREASURY STOCK - is stock that was previously issued and has been reacquired by the corporation. The corporation may then sell the treasury stock
Can a corporation acquire property with par value stock?
YES, property is an acceptable form of consideration, as long as the value of the property is at least as much as the par value of the shares given in exchange
e.g. $3 par, you give someone 50,000 shares for a piece of land - ok as long as land is worth at least $150,000
when the board determines the value of the consideration for an issuance, its determination of value is CONCLUSIVE, as long as it is made without FRAUD
e.g. corp issues $1,000,000 worth of stock to pay a director’s nephew for sweeping up the office for one week - this is CLEARLY FRAUD and is a waste of corporate assets and directors will be liable
What are the consequences of issuing par value stock for less than par value?
This is called “WATERED STOCK” and the directors are liable for the “water” - that is they are liable for the difference between what the stock should have sold for had it been sold at par, and the amount they received for it
e.g. $3 par, 10,000 shares issued, and the corporation sells it for $22,000. The corporation can sue for the $8,000 of “water” - and directors are liable if they knowingly authorized the issuance
The guy who bought the watered stock is liable as well bc he is charged with notice of par
however, if buyer transfers to THIRD PARTY, the THIRD PARTY is NOT LIABLE if acted in good faith (meaning she did not know about the “water”) - but THIRD PARTY’S status has no effect on liability of directors and the buyer
PRE-EMPTIVE RIGHTS **
PRE-EMPTIVE RIGHTS - this is the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a
(1) NEW ISSUANCE of common stock
(2) FOR MONEY (which includes cash or check)
if certificate is silent, a NEW ISSUANCE does NOT include
(i) sale of TREASURY stock
(ii) sales of shares authorized by the original certificate and sold WITHIN 2 YEARS OF FORMATION
- If certificate is SILENT regarding preemptive rights they DO NOT EXIST (certificate must say they exist)
e. g - S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. plans to issue an additional 3,000 shares. if S has pre-emptive rights, then S has the right to buy 600 shares (1/5th) of the new issuance so that after issuance he still owns 20% of co.
e. g. 2 - certificate provides for pre-emptive rights and C Corp issues stock to G to acquire Green Acres from G. Are there preemptive rights? - NO, bc this is not a new issuance FOR MONEY**, it is for property
