Issuance of stock Flashcards
how can corporation raise capital
- borrow
- sell stock
debt securities
corp borrows money and promises to repay with interest (called bonds)
person who gives $$ is a creditor but has NO OWNERSHIP in the corp
equity securities
corp issues stock (sells an ownership interest)
SH is an owner but NOT a creditor
authorized shares
shares that are described in the AOI which is what makes hem authorized
shares that have been sold are known as
issued and outstanding
shares that are authorized but unissued are shares that
have been reacquired by the corporation either through repurchase or redemption
subscription
written offer to buy stock from a corp
pre-incorporation subscriptions are irrevocable for
6 months unless otherwise agreed
post-incorp subscription are revocable
until accepted by the corporation
IOW: corp + subscriber are obligated under a subscription agreement when the board accepts the offer to buy stock…so subscriber will be obligated to buy and corp obligated to sell
what type of consideration is appropriate for stock issuance
any tangible or intangible property
Examples: money, services already performed for corp (ie getting stock instead of salary), discharge of a debt, promise to convey property in the future
trad’l view: par consideration
no par?
minimum issuance price - the min amount of consideration that the corp must receive to issue stock
no par: no min
watered stock
who is liable?
watch out for this!!
par value stock is issued for less than its par value
board - liable only if it knew
person who bought stock - NO DEFENSE, always liable
person transfer share to 3rd party - 3rd party not liable if they didnt know
Example: Corp issues 10,000 shares of $3 par to X for $22,000. Corp wants to recover $8,000 of “water”. Recover from board if it knowingly issued for $22,000. Buyer always liable
MBCA Approach for stock issuance
corp can issue stock for whatever consideration the directors deem appropriate
valuation is conclusive if made in good faith
preemptive right
right of existing SH to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money
this means that SH share will not be diluted
B owns 1,000 shares. Corp has 5,000 shares. B owns 1/5. Corp plans to issues 3,000 add’l stocks. So, B has the right to buy 600 shares (3,000/5 = 600) so she can maintain her 1/5 ownership in the corp.
do SH have preemptive right under MBCA
only if AOI says they do
if AOI is silent then they do not
