Fact Pattern 2: Issuance of Stock Flashcards
What are the two ways that a corporation can raise capital?
- Debt Securities - the corporation borrows money from X and agrees to repay X with interest. Debt securities are usually called bonds. The person holding the bond is a creditor rather than an owner.
- Equity Securities - The corporation sells an ownership interest to X. Equity interests are called stocks. A person holding stock is an owner not a creditor.
What is an issuance of stock?
When the corporation sells its own stock.
What is a subscription?
Written offers to buy stock from a corporation.
Is revocation of a pre-incorporation subscription allowed?
No. It is irrevocable for 6 months unless otherwise stated or all subscribers agree to allow revokation.
Is revocation of post-incorporation subscription allowed?
Yes, until the corporation accepts it.
What is the form of consideration required when buying stock?
Stock (or an option to buy stock) may be issued for any tangible or intangible property or benefit to the corporation. This includes money, property, and services already performed the corporation, discharge of a debt, promissory notes, and promises of future performance.
What does “par” mean?
The minimum issuance price for stock.
What does “no par” mean?
There is no minimum issuance price.
What is “treasury stock”?
This is stock that the company issued and then reacquired. It is considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
When the board sets the value for stock, is it conclusive?
Yes, as long as it is made in good faith.
What is “watered stock”?
Watered stock is when the board issues stock for less than the par price. For example, Corp. issues 10 shares of 3 par stock to X for 22 dollars. That means that there is 8 dollars of water.
Who is responsible for watered stock?
The board of directors if they knowingly authorized the issuance.
The person who bought the stock because he is presumed to have notice of the par value.
Third parties who buy the water stock without notice are not liable.
What is a “pre-emptive” right?
This is the right of an existing shareholder of common stock to maintain his percentage of ownership by buying stock whenever there is a new issuance of stock for money (cash or equivalent).
Hypo: S owns 1,000 shares of C corp. There are 5,000 outstanding shares. C corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has the right to buy as many as:
600 shares of new stock to maintain her percentage in the company.
She currently owns 20%, so she is entitled to 20% of the new issuance.
If the articles to do not provide pre-emptive rights, are they allowed?
No. They must be specifically provided for.
