FACT PATTERN 2: ISSUANCE OF STOCK- WHAT IS AN ISSUANCE? Flashcards
What is an issuance?
It’s when the corporation sells it’s own stock.
What is the purpose for an issuance?
It is a way for the corporation to raise capital.
Family Guy sells 3,000 shares of XYZ Corp. stock. Do the “issuance” rules apply? Why or why not?
No, it’s not an issuance
When do issuance rules in fact pattern 2 (issuance of a stock) apply?
apply only when there is an issuance. That means they apply only when the corporation is selling its own stock.
What is a subscription?
written offers to buy stock from corporation
How long is a pre-incorpration subscription irrevocable for? (unless what?)
6 months (Unless the subscription says otherwise or all subscribers agree to let you revoke.)
On January 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 S revoke?
No, irrevocable for 6 months
Are post-incorporation subscriptions revocable?
Yes, until acceptance by the corporation
At what point are the corporation and the subscriber obligated under a post-incorporation subscription agreement?
When the board accepts the offer
What are the forms of consideration the company can accept for an issuance?
split of authority here.
For the split of authority for the forms of consideration accepted by a corporation, what does every state agree on as an acceptable form?
Every state agrees that these are permitted: (1) money (cash or check), (2) tangible or intangible property, and (3) services already performed for the
corporation.
For the split of authority for the forms of consideration accepted by a corporation, what forms of consideration do states split on?
Promissory notes and future services
If promissory notes and future services are prohibited forms of consideration in the state what is the consequence? what are the treated as?
It’s unpaid stock meaning it’s all treated as water
What does par mean?
minimum issuance price
C Corp. is issuing 10,000 shares of $3 par stock. It must receive at least?
$30,000
C Corp. is issuing 10,000 shares of $3 par stock. Could C Corp get more than $30,000? Why or why not?
Yes, par means minimum
What does no par mean?
no minimum issuance price
Who sets the issuance price?
the board of directors
What is treasury stock?
stock the company issued and then reacquired
Is treasury stock considered authorized?
Yes
Is treasury stock considered issued?
No, it is considered unisued
Can the corporation resell treasury stock?
Yes
What price must the board resell treasury stock at?
the board sets any issuance price it wants.
Say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services?
The board of directors
Is the board’s valuation of price issuance conclusive?
Yes, if made in good faith
On the bar exam, if they give you par stock, what issue should you look for?
Watered stock
C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Are the directors liable? (under what circumstances?)
Yes. Directors if they knowingly authorized the issuance.
C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Is the guy who buys the stock liable? if he knows about the water?
if the buyer knew about “the water” he is liable.
Is there a defense for the guy that bought the stock with knowledge of the water?
No. There is no defense; he is charged with notice of the par value.)
What if the buyer knew about the water of a issuance sells it to a third part who doesn’t know about the water?
TP is not liable if she didn’t know about the water, if she did know she is liable.
What is a preemptive right?
A pre-emptive right is the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for MONEY (cash or its equivalent, like a check).
Do you have a pre-emptive right to buy stock when the corporation issues stock for services already performed? Why or why not?
No. There is only a pre-emptive right when there is a new issuance for MONEY.
Does “new issuance” include the issuance of treasury stock?
There is a split, some states say yes some states no.
S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has the right to buy how much of the stock?
600 shares. Pre-emptive right gives you the right to maintain percentage of ownership
If the articles are silent, do we have pre-emptive rights?
In most states, no
Suppose the C Corp. articles provide for pre-emptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?
No, because it is not an issuance for money.
