Financing the organization

Question 1

Common stock

Answer 1

Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders have the lowest priority in the ownership
structure (i.e., in the event of liquidation, common stockholders have rights to company assets only AFTER bond holders, preferred stockholders, and other debt holders have been paid in full.

Question 2

Preferred stock

Answer 2

Preferred stock does NOT always have voting rights. Shares of stock are
preferred if their holders are:
(1) Entitled to receive payment of dividends BEFORE any payment of dividends to
another class of stockholders (e.g., common stockholders); OR
(2) Entitled, in the event of liquidation or dissolution, to receive any payments or
distributions BEFORE another class of stockholders (e.g., common stockholders).

Question 3

Authorized shares

Answer 3

Authorized shares are the maximum number of shares that a corporation is legally permitted to issue under its articles of incorporation.

Question 4

Outstanding shares

Answer 4

Outstanding shares are the total number of shares issued by the corporation and held by the shareholders. Generally, each outstanding share is entitled to one vote
(regardless of class),UNLESS otherwise provided in the articles of incorporation.

Question 5

Treasury stock

Answer 5

Treasury stock consists of shares that a company issued and subsequently reacquired.
Shares that the corporation reacquired are NOT considered outstanding and CANNOT
be counted in a shareholder vote.

Question 6

Preemptive rights

Answer 6

A preemptive right is a right of a current shareholder to purchase additional shares in
the corporation before outsiders are permitted to do so in order to maintain their
percentage of ownership in the corporation.

In most states, a corporation must “opt in” to create preemptive rights by expressly
including such rights in the corporation’s articles of incorporation. However, in some states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in the corporation’s articles of incorporation.

Question 7

when do preemptive rights not exist?

Answer 7

Unless otherwise set forth in the articles, preemptive rights do NOT exist for:

(1) Preferred shares that CANNOT be converted to common stock;
(2) Shares sold for a consideration other than cash; OR
(3) Shares issued by majority shareholder vote to directors, officers, or employees.

Question 8

Distribution rights

Answer 8

Unless otherwise set forth in the articles of incorporation, a shareholder does NOT have
any right to receive distributions (whether in the form of dividends or otherwise) from
the corporation. Dividends and distributions are generally paid to shareholders at the
full discretion of the board of directors.

However, if the board of directors refuses to issue distributions in bad faith, but not
necessarily in bad judgment, the shareholders may be able to compel distribution.