Finance

Question 1

What is “capital structure”?

Answer 1

Capital structure refers to the long-term investment in the corporation, including both capital stock and debt (bonds) which, although not permanent, are relatively long term.

Question 2

What is “authorized capital”

Answer 2

The number and kind of shares that may lawfully be issued by the corporation as provided in the articles of incorporation

Question 3

Must a corporation have common stock?

Answer 3

Yes, a corporation must have at least one class of common stock.

Question 4

What does common stock represent?

Answer 4

The residual ownership and claim to assets upon liquidation.

Question 5

What is “straight” preferred stock?

Answer 5

This means that the shareholder is paid a fixed dividend, which is payable prior to any dividend on the common stock.

• The holder of such stock does NOT participate further in the profits of the corporation and thus become an investor with a more or less fixed return

Question 6

Preferred dividends are payable ONLY IF

Answer 6

1. Declared by the board of directors and
2. A two-step solvency test is met

Question 7

Shares may be, but need not be, represented by certificates. TRUE OR FALSE?

Answer 7

True.

Question 8

If a corporation issues certificates, at a minimum, each share certificate must state on its face:

Answer 8

1. The name of the corporation and that the corporation is organized under the laws of Florida;
2. The name of the person to whom the certificate is issued; and
3. The number and class of shares, and the designation of the series, if any, that the certificate represents

Question 9

What must the corporation do if certificates are NOT issued?

Answer 9

Send the shareholder a written statement of the information required on certificates within a reasonable time after issuance.

Question 10

What is a subscription agreement?

Answer 10

A contract by which the subscriber agrees to purchase a certain number of shares of stock of the corporation at the subscription price specified in the agreement.

Question 11

Subscription Agreements

Revocability

Common Law

Answer 11

Preincorporation subscription agreements, in the absence of statute, are usually revocable until adopted by the corporation after its formation unless more than one subscriber is party to the agreement, in which case, some courts hold the agreement enforceable on the theory that the mutual subscriptions provide adequate consideration.

Question 12

Subscription Agreements

Revocability

Florida Statute

Answer 12

The Florida statute provides that a written preincorporation agreement is irrevocable for six months unless it provides otherwise, OR unless all of the subscribers consent to revocation

Question 13

Quality of consideration for shares

Answer 13

A corporation may issue shares for cash or other property, tangible or intangible, or for labor or services actually performed for the corporation, or promises to perform services evidenced by a written contract. The Florida statute also expressly permits payment for shares by promissory note.

Question 14

Amount of consideration for shares

Answer 14

Shares may be issued for such consideration as is determined from time to time by the board of directors

Question 15

Adequacy of Consideration for Shares

Answer 15

When stock is issued for consideration other than cash, the board must determine that the consideration is adequate.

• The board’s determination of adequacy is conclusive if a question later arises whether the corporation received adequate consideration for the shares.

Question 16

What is shareholder liability?

Answer 16

The Florida statute provides that a holder of, or subscriber to, shares of a corporation is under NO obligation to the corporation or its creditors, OTHER THAN the obligation to pay to the corporation the full consideration for which such shares were issued or to be issued.

Question 17

Are good faith transferees liable?

Answer 17

No. Transferees of shares in good faith and without knowledge or notice that the full consideration has not been paid, are not personally liable to the corporation or its creditors for any unpaid portion of the consideration.

• The transferor continues to be liable

Question 18

What is the time limit on recovery?

Answer 18

No obligation may be asserted more than five years after the earlier of:

1. The issuance of the stock, or
2. The date of the subscription upon which the assessment is sought

Question 19

What is the doctrine of equitable contribution?

Answer 19

It requires that all subscribers purchasing stock of the corporation at the same time be required to pay the same price, and, in the case of new stock being issued by a corporation already in business, that the price is adequate so as not to dilute unfairly the actual value of existing shareholder’s stock.

• However, by unanimous consent of the subscribers, stock can be issued contemporaneously at differing prices.

Question 20

Federal Securities Regulation

Answer 20

The issuance of any security (stock and bonds) by an “issuer” must either satisfy the requirements of the Securities Act of 1933 or qualify for an exemption therefrom.

Question 21

Federal Securities Regulation

Registration Requirements

Answer 21

• Before nonexempt securities may be distributed by sale to the public, it is necessary to file a registration statement with the SEC disclosing FULLY AND FAIRLY all material facts concerning the corporation, its business, and management, including independently audited financial statements.
• A prospectus must also be given to each investor

Question 22

Federal Securities Regulation

Consequences of Failure to Register

Answer 22

Failure to register, or any false or misleading statement or omission of a material fact, may result in liability to the corporation, its officers and directors and to the underwriters handling the distribution

Question 23

Federal Securities Regulation

Scope of Coverage

Answer 23

• Most close corporations qualify for an exemption, so only corporations “going public” must ordinarily be concerned with an SEC registration
• However, the broad anti-fraud provisions of the 1933 Act apply to all sales of securities, including sales exempt from registration

Question 24

What are “preemptive rights”?

Answer 24

To protect shareholders from dilution of their proportionate interest in the corporation, the courts developed the doctrine of preemptive rights.

Question 25

Under the Florida statute, do shareholders have preemptive rights?

Answer 25

No. Under the Florida statutes, shareholders have no preemptive rights to acquire unissued shares or treasury shares unless and only to the extent that such rights are expressly provided in the articles of incorporation.

Question 26

Preemptive Rights

Rights Included

Answer 26

A statement included in the articles that “the corporation elects to have preemptive rights” or similar works, means that the following principles apply except to the extent provided otherwise:

1. The shareholders have a preemptive right; and
2. A shareholder may waive his preemptive right. A written waiver is irrevocable.

Question 27

Do all issues of stock trigger the preemptive right?

Answer 27

No. There is no preemptive right with respect to the following:

1. Shares issued as compensation to directors, officers, agents, or employees of the corporation;
2. Shares issued to satisfy conversion or option rights;
3. Shares that are issued within six months from the effective date of incorporation;
4. Shares sold otherwise than for money; and
5. Shares issued pursuant to a plan of reorginization

Question 28

May a corporation acquire its own shares?

Answer 28

Yes. Such a transaction constitutes a distribution by the corporation and is subject to the same limitations as other distributions.

• They constitute authorized, but unissued shares of the same class

Question 29

Repurchase by installment

Answer 29

The Florida statute provides that for purposes of a distribution for acquisition of the corporation’s shares, the effect of the distribution is measured as of the earlier of (i.e. when the solvency test should be properly applied):

1. The date money or other property is transferred or debt is incurred by the corporation (outset test); or
2. The date the shareholder ceases to be a shareholder with respect to the acquired shares

Question 30

What does Article 9 of the UCC regulate?

Answer 30

Some aspects of the purchase and sale of financial assets

Question 31

What do “financial assets” include?

Answer 31

It includes securities and other interests in persons or enterprises commonly dealt in as investment mediums

Question 32

Certificated and uncertificated securities are part of the system OF…

Answer 32

Direct holdings (where the owner holds ownership directy)

Question 33

But, today, most investment devices are held…

Answer 33

Indirectly

Question 34

Direct Holding System Rules - Protected purchaser

Answer 34

Similar to the system Article 3 develops to protect holders in due course of negotiable interests (but instead of a HDC, they are called a “protected purchaser”

Question 35

What is the definition of a protected purchaser?

Answer 35

One who:

1. Gives value;
2. Does not have notice of any adverse claim to the security, and
3. Obtains control of the security.

Question 36

What does a protected purchaser acquire?

Answer 36

Whatever rights the transferor had and takes the security free of any adverse claim.

Question 37

What is an adverse claim?

Answer 37

A person has an adverse claim if she has a property interest in a financial asset that conflicts with the rights of another person to hold, transfer, or deal with the financial asset.

Question 38

When does the purchaser have control of a certificated security?

Answer 38

A purchaser has control of a certificated bearer security as soon as the security is delivered to the purchaser. A person has control of a certificated security in registered form if the instrument is delivered to the purchaser and is either indorsed in blank or is issued or registered by the issuer in the name of the purchaser.

Question 39

When does the purchaser of an uncertificated security gain control?

Answer 39

If it is delivered to the purchaser or the issuer has agreed that it will comply with instructions from the purchaser without further consent from the registered owner.

Question 40

What is a “security entitlement”?

Answer 40

A security entitlement is the ownership interest of an “entitlement holder” of a financial asset.

Question 41

Who is an “entitlement holder”?

Answer 41

The person identified in the records fo a securities intermediary as the person having rights in securities of the intermediary.

Question 42

What are the rights of purchaser of entitlement from entitlement holder?

Answer 42

A person who purchases a security entitlement from an entitlement holder takes free of any adverse claim to the financial asset or security entitlement if the purchaser gives value, does not have notice of the adverse claim, and obtains control.

Question 43

When does a purchaser have control of security entitlement?

Answer 43

If the purchaser becomes the entitlement holder, the securities intermediary has agreed that it will obey the purchaser’s orders without further consent from the entitlement holder, or another person has control of the security entitlement on the purchaser’s behalf.

Question 44

Is a contract or modification of a contract for the purchase or sale of a financial asset within the statute of frauds?

Answer 44

No writing is necessary, even if the contract or modification by its terms cannot be performed within one year.

Question 45

Does the issuer have any defenses against a claim by a purchaser for value (PV)?

Answer 45

Yes, but they are limited. The following defenses are INEFFECTIVE against a PV

• Term of security;
• Defects as to validity;
• genuineness;
• unauthorized signature;
• incompleteness;
• nondelivery

Question 46

What are the rights of purchasers?

Answer 46

The basic rule is that on delivery of any security, the purchaser acquires the rights of his transferor; but a protected purchaser also acquires the security free of any adverse claim.

Question 47

What are the rights of purchasers?

Answer 47

The basic rule is that on delivery of any security, the purchaser acquires the rights of his transferor; but a protected purchaser also acquires the security free of any adverse claim.

Question 47

What are the rights of purchasers?

Answer 47

The basic rule is that on delivery of any security, the purchaser acquires the rights of his transferor; but a protected purchaser also acquires the security free of any adverse claim.

Question 47

What are the rights of purchasers?

Answer 47

The basic rule is that on delivery of any security, the purchaser acquires the rights of his transferor; but a protected purchaser also acquires the security free of any adverse claim.

Question 48

What are the rights of purchasers?

Answer 48

The basic rule is that on delivery of any security, the purchaser acquires the rights of his transferor; but a protected purchaser also acquires the security free of any adverse claim.

Question 49

Who does the seller’s warranty run to?

Answer 49

Any PV. The seller warrants his transfer is “effective and rightful”; the security is genuine and free of material alterations; and he knows of no fact impairing the validity of the security

Question 50

What are the creditor’s rights?

Answer 50

A creditor may attach the interest of a debtor in a certificated security only by actual seizure of the security certificate by the officer making the attachment or levy.

• However, a creditor may reach a certificated security for which the certificate has been surrendered to the issuer by legal process upon the issuer.
• The interest of a debtor in an uncertificated security ma

Question 51

How does transfer of a certificated security work?

Answer 51

Delivery of a certificated security to a purchaser occurs when the purchaser acquires possession of the security certificate, another person on behalf of the purchaser acquires possession of the security certificate, or a securities intermediary acting on behalf of the purchaser acquires possession of the security certificate.

Question 52

How does transfer of an uncertificated security work?

Answer 52

Delivery of an uncertificated security to a purchaser occurs when the issuer registers the purchaser as the registered owner or when another person becomes the reigstered owner on behalf of the purchaser.

Question 53

The registration requirements apply ONLY to:

Answer 53

registered form securities

Question 54

What is the traditional rule for liability for stock transactions?

Answer 54

Insider trading traditionally involved no fiduciary duties since officers’ and directors’ fiduciary duties are owed to the corporation, not to individual shareholders

Question 55

What is the modern rule for liability for stock transfers?

Answer 55

Even today, a majority of courts do not require insiders to disclose inside information to shareholders from whom they purchase shares.

Question 56

What is the “special facts” doctine?

Answer 56

The exception to the general rule, by which insiders dealing face to face with shareholders are required to disclose to the seller any unknown facts of an unusual nature.

Question 57

The Florida Supreme Court has held that directors and their tippees ARE OR ARE NOT liable to their corporation for personal profits realized in trading on the basis of inside information?

Answer 57

ARE NOT!

Question 58

What is Section 16(b) and what is it narrowly aimed at?

Answer 58

It is narrowly aimed at “short-swing” profits by insiders.

• It provides for the recovery by the corporation of any profits realized by insiders (officers, directors, and shareholders owning more than 10% of any class) from any purchase and sale, or sale and repurchase of the corporation’s securities within a six-month period

Question 59

Does Section 16(b) apply to all trading?

Answer 59

Yes, regardless of the insider’s good faith or lack of inside information.

Question 60

What does Rule 10b-5 provide?

Answer 60

It prohibits any fraud or deceit, including any false or misleading statement or omission, in connection with the purchase or sale of ANY security.

Question 61

What is the scope of application of Rule 10b-5?

Answer 61

It applies to all sales and purchases of securities, subject only to a minimal nexus with interstate commerce.

• It applies even to securities exempt from registration or other requirements of the federal securities law
• Thus, it applies both to stock exchange transactions and to negotiated transactions involving close corporations

Question 62

Rule 10b-5

Insider Trading

Answer 62

In addition to fraud, rule 10b-5 prohibits corporate insiders (such as a corporation’s directors, officers, employees, ) from trading on the basis of inside information, and if they do so, they breach a duty of trust and confidence owed to the issuer of the security or its shareholders.

Question 63

What is “insider information”?

Answer 63

Information not disclosed to the public that an investor would think is important when deciding whether or not to invest in a security