FACT PATTERN 2: ISSUANCE OF STOCK- WHAT IS AN ISSUANCE?

Question 1

What is an issuance?

Answer 1

It’s when the corporation sells it’s own stock.

Question 2

What is the purpose for an issuance?

Answer 2

It is a way for the corporation to raise capital.

Question 3

Family Guy sells 3,000 shares of XYZ Corp. stock. Do the “issuance” rules apply? Why or why not?

Answer 3

No, it’s not an issuance

Question 4

When do issuance rules in fact pattern 2 (issuance of a stock) apply?

Answer 4

apply only when there is an issuance. That means they apply only when the corporation is selling its own stock.

Question 5

What is a subscription?

Answer 5

written offers to buy stock from corporation

Question 6

How long is a pre-incorpration subscription irrevocable for? (unless what?)

Answer 6

6 months (Unless the subscription says otherwise or all subscribers agree to let you revoke.)

Question 7

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?

Answer 7

No, irrevocable for 6 months

Question 8

Are post-incorporation subscriptions revocable?

Answer 8

Yes, until acceptance by the corporation

Question 9

At what point are the corporation and the subscriber obligated under a post-incorporation subscription agreement?

Answer 9

When the board accepts the offer

Question 10

What are the forms of consideration the company can accept for an issuance?

Answer 10

split of authority here.

Question 11

For the split of authority for the forms of consideration accepted by a corporation, what does every state agree on as an acceptable form?

Answer 11

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.

Question 12

For the split of authority for the forms of consideration accepted by a corporation, what forms of consideration do states split on?

Answer 12

Promissory notes and future services

Question 13

If promissory notes and future services are prohibited forms of consideration in the state what is the consequence? what are the treated as?

Answer 13

It’s unpaid stock meaning it’s all treated as water

Question 14

What does par mean?

Answer 14

minimum issuance price

Question 15

C Corp. is issuing 10,000 shares of $3 par stock. It must receive at least?

Answer 15

$30,000

Question 16

C Corp. is issuing 10,000 shares of $3 par stock. Could C Corp get more than $30,000? Why or why not?

Answer 16

Yes, par means minimum

Question 17

What does no par mean?

Answer 17

no minimum issuance price

Question 18

Who sets the issuance price?

Answer 18

the board of directors

Question 19

What is treasury stock?

Answer 19

stock the company issued and then reacquired

Question 20

Is treasury stock considered authorized?

Answer 20

Yes

Question 21

Is treasury stock considered issued?

Answer 21

No, it is considered unisued

Question 22

Can the corporation resell treasury stock?

Answer 22

Yes

Question 23

What price must the board resell treasury stock at?

Answer 23

the board sets any issuance price it wants.

Question 24

Say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services?

Answer 24

The board of directors

Question 25

Is the board’s valuation of price issuance conclusive?

Answer 25

Yes, if made in good faith

Question 26

On the bar exam, if they give you par stock, what issue should you look for?

Answer 26

Watered stock

Question 27

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?)

Answer 27

Yes. Directors if they knowingly authorized the issuance.

Question 28

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?

Answer 28

if the buyer knew about “the water” he is liable.

Question 29

Is there a defense for the guy that bought the stock with knowledge of the water?

Answer 29

No. There is no defense; he is charged with notice of the par value.)

Question 30

What if the buyer knew about the water of a issuance sells it to a third part who doesn’t know about the water?

Answer 30

TP is not liable if she didn’t know about the water, if she did know she is liable.

Question 31

What is a preemptive right?

Answer 31

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).

Question 32

Do you have a pre-emptive right to buy stock when the corporation issues stock for services already performed? Why or why not?

Answer 32

No. There is only a pre-emptive right when there is a new issuance for MONEY.

Question 33

Does “new issuance” include the issuance of treasury stock?

Answer 33

There is a split, some states say yes some states no.

Question 34

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?

Answer 34

600 shares. Pre-emptive right gives you the right to maintain percentage of ownership

Question 35

If the articles are silent, do we have pre-emptive rights?

Answer 35

In most states, no

Question 36

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?

Answer 36

No, because it is not an issuance for money.