Issuance of Stock Flashcards
Background
To start and operate a corporation, we need money. We can get money by either borrowing or raising it (by selling stock). We can even do both.
* Borrowing = Debt Security
* Raising = Equity Security
Either way, the corporation will issue a security to the investor. Security is a fancy word for investment.
If we borrow money, we issue a debt security (i.e. bond). The bond is our promise to repay. If it’s not secured by other assets, it’s called a debenture. The holder of the debt is a creditor (not an owner).
If we raise money via stocks, we are issuing an equity security. Here, the stock holder (also called a shareholder) will actually be an owner (not a creditor) of the corportion.
Terminology: Stonks
**Authorized Shares: **shares described in the articles of incorporation
Once we sell the shares, they’re issued and outstanding.
If we reacquire these shares, they are now authorized but unissued (sometimes called treasury shares).
Shares can be certificated (comes w/ a shiny certificate) or uncertificated.
Forms of Consideration
MBCA: stock may be issued in exchange for any tangible or intangible property or benefit to the corporation
can include money, cash, checks, property, servces already performed, and discharge of debts. also includes promissory notes and future services.
The MBCA has expanded what is acceptable consideration
CL: DID NOT ALLOW shares to be issued in exchange for promissory notes or promises of future work or future conveyance of property
Classification of Stonks
Common Shares: each shareholder has an equal right
Classes: when the corporation varies the ownership rights of stocks
Share options: right to purchase shares in the future under terms predetermined by the board
Subscriptions: written offers to buy stock
* under MBCA: pre-incorporation subscriptions are irrevocable for 6 months (unless provided otherwise); unless otherwise provided, payment is due upon demand from the board.
* post-incorporation subscriptions are revocable until accepted by the corporation
Amount of Consideration
Par means minimum issuance price.
**CL: **Traditionally, stocks could not be issued for less than par value. furthermore, the consideration recieved had to be held in a special account at a certain value.
- if a stock IS issued for less than par value, it’s watered stock
MBCA: eliminates par value - lets board issue shares for whatever consideration directors deem appropriate
- note: if the exam states that an agreement has par value for a stock, and the board issues a watered stock, they may be liable for breach of fiduciary duty. the MBCA doesn’t have clear guidelines for how to proceed, but it’s worth mentioning.
No par - no minimum issuance price. Board can have stock issued for any price it wants.
Preemptive Rights
A preemptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money.
Asserting preemptive rights
Under the MBCA, shareholders do not have a preemptive right to purchase newly issued shares to maintain their proportional ownership interest UNLESS the articles provide that right.
If articles are silent = no rights.
Preemptive Right Limitations
Even if articles provide preemptive rights, shareholders generally have no right in shares issued: (1) for consideration other than cash; (2) within six months after incorporation; or (3) without voting rights but having a distribution preference
