Issuance of Stock Flashcards
When does an issuance of stock occur?
When a corporation sells its own stock, and only when the corporation sells its own stock.
What is a subscription?
It is a written, signed offer to buy stock from the corporation.
When can a subscription be revoked?
If the subscription was formed pre-incorporation, it is irrevocable for three months, unless the subscription provides otherwise or all subscribers agree to let you revoke. Post-incorporation subscriptions are revocable until accepted by the corporation (through the Board of Directors).
What happens if the corporation accepts the offer and the subscriber defaults on payment?
If he has paid less than half of the purchase price, and fails to pay the rest within 30 days of written demand, the corporation can keep the money paid and cancel the shares. It becomes authorized and unissued stock, the corporation can sell it. If he has paid half or more, and fails to pay the rest within 30 days of written demand, the corporation must try to sell the stock to someone else for cash. If they can’t find someone to pay the remaining balance, the corporation can sell it as authorized, unissued stock. If someone is willing to pay more than the remaining balance, the defaulting subscriber will recover any excess over what she agreed to pay.
What forms of consideration can the corporation receive when it issues stock?
There are five permitted forms: 1) Money (cash or check) 2) Tangible or Intangible property 3) Services already performed for corporation 4) A binding obligation to pay money or property in the future 5) A binding obligation to perform future service having an agreed value. The latter two categories are liberally construed.
What are prohibited forms of consideration the corporation can receive for stock? What happens to the stock?
Anything other than the five permitted forms.It is considered unpaid stock and it is all treated as water.
What does par mean?
Par refers to the minimum issuance price.
What does no par mean?
This means there is no minimum issuance price and the stock can sell at any price.
What is treasury stock?
It is stock that was previously issued and has been reacquired by the corporation. The corporation may then sell the treasury stock at any price - it is treated as no par.
What are the consequences of issuing par stock for less than par value (i.e. watered stock)?
The directors are liable for the water if they knowingly authorized the issuance. The person who bought the watered stock is also liable, because he is charged with notice of par. If this person transfers to a third party, the third party is not liable if she did not know about the water. But this has no effect on the liability of the original buyer or the director.
What are pre-emptive rights?
This is the right of an existing stockholder to maintain her percentage of ownership by buying stock, whenever there is a new issuance of common stock for money (which includes cash or check).
For example, if a shareholder owns 1000 shares of the 5000 outstanding, she currently owns 20% of the outstanding shares, and she can buy 20% of the new issuance. So if the new issuance is 3000 shares, she can by 600 of those shares.
When is sale of stock not considered a new issuance of stock?
When the corporation is selling treasury stock, this is not considered a new issuance. If the stock was authorized by the certificate and sold within two years of formation, it is not considered a new issuance.
In both of these cases, preemptive rights don’t attach.
What happens if the certificate is silent regarding preemptive rights?
Preemptive rights do not exist, unless the certificate says so.
