Issuance of Stock Flashcards
BACKGROUND
To start and operate a corporation, we need money (capital). The corporation can either borrow the money or raise it by selling stock (or both). Either way, the corporation will issue a security to the investor. Security is a fancy word for investment.
Debt Securities
When the corporation borrows money, it issues a debt security, which is usually called a bond. The bond is a promise that the corporation will repay the loan with interest. If the loan is unsecured by corporate assets, it may be called a debenture. Importantly, the holder of debt securities is a creditor, but not an owner, of the corporation.
Equity Securities
When the investor buys an ownership interest in the corporation, it issues equity securities, which is stock (the investor holds shares of stock). Importantly, the money invested does not create a debt. The shareholder is an owner, but not a creditor, of the corporation.
Shares
shares described in the corporation’s articles of
incorporation are authorized shares. Those shares that have been sold are issued and outstanding
Shares that have been reacquired by the corporation through repurchase or redemption are authorized
but unissued.
Share Options
A corporation may issue share options. An option is the right to purchase shares in the future under terms predetermined by the board of directors. Options may be offered in exchange for any type of consideration, including future services.
Preincorporation Subscription
Subscriptions are written offers to buy stock from a corporation. One issue may be whether such an offer may be revoked. Under the MBCA, preincorporation subscriptions are irrevocable for six months unless otherwise provided in the terms of the subscription
agreement or unless all subscribers consent to revocation.
Postincorporation Subscription
Postincorporation subscriptions are revocable until accepted by the corporation. In other words, the corporation and the subscriber are obligated under a subscription agreement when the board accepts
the offer
Amount of Consideration Traditional View—Par
Par means minimum issuance price. Traditionally, stock could not be issued by a corporation for less than the stock’s stated par value, and the consideration received for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares.
MBCA Approach—Board Determines Value
The MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate. Consideration received for the issuance of stock need not be placed in any special account.
