Issuance of Stock

Question 1

Background

Answer 1

• need $ to start corp -> either borrow the $ or raise by selling stock (or both)
  -> either way, corp will issue a security (investment) to the investor

Question 2

Debt Securities

Answer 2

• gets issued when the corporation borrows money
• usually called a bond
• bond = promise that corp will repay the loan with interest
• if loan unsecured by corp asset, may be called a debenture
• note that debt obs can have certain features too

Question 3

Holder of Debt Securities

Answer 3

• creditor, but NOT owner of corp

Question 4

Bearer/Coupon Bond

Answer 4

• where debt obs payable to the holder of the bond

Question 5

Registered Bond

Answer 5

• debt obs payable to the owner registered on the corporation’s records

Question 6

Equity Securities

Answer 6

• equity securities = stock -> get issued when investor buys an ownership interest in the corporation
• money invested in this manner does NOT create a debt -> b/c shareholder = owner but not creditor

Question 7

Terminology Re Shares

Answer 7

• authorized shares = described in the corporation’s articles of incorporation
• those sold = issued + outstanding
• authorized but unissued = those reacquired by corp through repurchase or redemption

Question 8

Classification of Shares

Answer 8

• corp can choose to issue only one type of share (each SH gets equal ownership right) -> common shares
• OR ownership rights can be varied if articles provide stock to be divided into classes or series w/in a class

Question 9

Share Option

Answer 9

• option = 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

Question 10

Issuance

Answer 10

• issuance of stock = when corporation sells its own stock
• note that the rules in this section of cards apply only when there’s an issuance (corp selling own stock)

Question 11

Subscriptions

Answer 11

• written offers to buy stock from corp
• q of whether or not can be revoked

Question 12

Preincorporation Subscription

Answer 12

• irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all subscribers consent to revocation

Question 13

Preincorporation Subscription - Payment

Answer 13

• unless otherwise provided, payment is due upon demand of the board
• demand may not be made in a discriminatory manner
• a subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription + any amounts paid on the subscription, at the corp’s option

Question 14

Postincorporation Subscription

Answer 14

• revocable until accepted by the corporation
  -> i.e. corp + subscriber are obligated once board accepts the offer

Question 15

Consideration - Form

Answer 15

• corporation needs to receive consideration when issues stock
  -> under MBCA, may be for any tangible or intangible property or benefit to the corporation
• includes money (cash or check), property, services already performed for corp + discharge of a debt
  -> also includes promissory notes to corp + future services to corp

Question 16

Exam Tip - Consideration

Answer 16

• MBCA expanded forms of consideration allowed
• note that MBCA has been adopted in NC

Question 17

Amount of Consideration - Traditional View

Answer 17

• par: minimum issuance price
• traditionally, stock couldn’t be issued by corp for less than the stock’s stated par value
  -> also 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
• “no par” means corp can have stock issued for any price it sets

Question 18

Watered Stock

Answer 18

• can occur when par value stock is issued for less than its par value
• book says to watch for on exam

Question 19

Amount of Consideration - MBCA Approach

Answer 19

• MBCA has generally eliminated concept of par
• BOARD determines value under MBCA -> can issue shares for whatever consideration it deems appropriate
• consideration doesn’t need to be placed into a special account

Question 20

MBCA - Consideration Other Than Cash

Answer 20

• if corp issues stock in exchange for consideration other than cash, such as property or services, board determines value of the property or services
• board’s valuation is conclusive if made in good faith

Question 21

MBCA - Process of Paying Consideration

Answer 21

• stock considered fully paid + nonassessable once corp receives the consideration for which the board authorized the issuance
• SH who fails to pay full amount agreed can be held liable for unpaid sums

Question 22

MBCA - What happens if articles specify par value?

Answer 22

• concept of par value mostly dead under MBCA BUT articles of inc can specify par value for stock
• in this case, if dirs authorize sale of stock for less than the stated par value, the shares will probs be treated as validly issued, but dirs who authorized the issuance can be held liable for breach of their fiduciary duty

Question 23

Right to Maintain Percentage of Ownership

Answer 23

• aka preemptive right
• right of an existing SH of common stock to maintain her percentage of ownership in the company by buying stock whenever there’s a new issuance of stock for money (meaning cash or its equivalent, like a check)

Question 24

MBCA - Preemptive Rights

Answer 24

• need to be stated in articles (otherwise SHs have NO preemptive rights)

Question 25

Preemptive Rights - Limitations

Answer 25

• even if the articles don’t provide a preemptive right, SHs generally have no preemptive right in shares issued:
  1) for consideration other than cash (for example, for services of an employee)
  2) w/in six months after incorporation OR
  3) without voting rights but having a distribution preference