Issuance of Stock Flashcards
What is issuance?
Issuance of stock occurs when a corporation sells its own stock.
It is one way a corporation can raise capital. Investors buy stock and thereby become holders of an equity security. They are owners of the corporation.
Issuance of stock distinguished from issuance of bonds
W/ a bond, the investor makes a LOAN to the corporation, to be repaid (usually w/ interest) as agreed in the K. The holder of a bond is a creditor (NOT an owner) of the corporation. She holds a debt security (NOT an equity security).
What is a debenture?
A loan, the repayment of which is not secured by corporate assets.
Def: Subscription
A written, signed offer to buy stock from the corporation.
Revocation of PRE-incorporation subscriptions
A pre-incorporation subscription is irrevocable for 3 months UNLESS the subscription provides otherwise or all subscribers agree to let you revoke.
(those forming the corp need to be able to rely on having monies)
Revocation of POST-incorporation subscriptions
Yes, until accepted by the corporation (BoD accepts the offer)
What happens if the corp accepts a subscription offer and the subscriber defaults on payment??
- If subscriber has paid LESS THAN HALF of the purchase price, and fails to pay the rest w/in 30 days or written demand, the corp can keep the money paid, cancel the shares making them authorized and unissued, and sell them.
- If subscriber has paid HALF OR MORE, and fails to pay the rest w/in 30 days of written demand, the corp MUST try to sell the stock to someone else for cash (or binding ob to pay cash). If nobody is willing to pay the balance, corp can keep the money, cancel the shares, and sell the stock. If someone pays MORE than the remaining balance due, the defaulting subscriber recovers any excess over what she agreed to pay - any corp expenses from finding new guy.
CONSIDERATION:
What are the five permitted forms of consideration for an issuance?
1- Money (cash or check)
2- Tangible or intangible property
3- Services already performed for the corporation
3- A binding obligation to pay money or property in the future (ex- promissory note)
4- A binding obligation to perform future services having an agreed value
What happens if the corp issues stock to somebody for NO consideration?
It is called unpaid stock and it is treated as water
Def: Par
Par = minimum issuance price
- can always sell for more than par
- “No Par” means there is no minimum issuance price; can issue for any price set by the BoD unless the certificate lets the s/h set the issuance price.
Def: Treasury stock
Stock that was previously issued and has been reacquired by the corporation.
- corporation may re-sell treasury stock
- treasury stock is treated as no par (has no minimum price)
Can a corporation acquire property w/ par value stock?
Yes, so long as the property is worth at least as much as the par value of the stock. (property is proper form of consideration).
- when BoD determines the value of the consideration for an issuance, its determination of value is conclusive so long as it is made w/o fraud.
Consequences of issuing par stock for less than par value?
WATERED STOCK!
- directors liable for the water if they knowingly authorized the issuance
- person who bought the watered stock is liable and has no defense b/c he is charged w/ notice of par
- a third party purchaser is not liable if she acted in good faith (aka did not know a/b the water)
** PRE-EMPTIVE RIGHTS **
Def- the right of an existing s/h to maintain her percentage of ownership by buying stock whenever there is a NEW ISSUANCE of common stock for MONEY (cash or check)
- Absent express provision in the certificate, no preemptive rights exist as to (i) treasury shares; (ii) shares offered for consideration other than money; (iii) shares authorized in the original certificate and sold or optioned w/in 2 years of filing
- Pre-emptive rights exist ONLY if the certificate says so
