Issuance of Stock

Question 1

What is the issuance of stock?

Answer 1

It is a way for the corporation to raise capital
Term of Art - Corp sells its own stock (If we see the corp selling its own stock than we know that it will be under this fact pattern)

Question 2

Family Guy sells 3,000 shares of XYZ Corp. stock. Do the “issuance” rules here in Fact Pattern 2 apply?

Answer 2

No - This is not an issuance

Only when the corp sells its own stock

Question 3

What are subscriptions?

Answer 3

Written offers to buy stock from corporation

Question 4

On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

Answer 4

No - Under the The Revised Model Business Corporation Act (RMBCA) stock reincorporation subscriptions are irrevocable for 6 months

Question 5

Are post-incorporation subscriptions revocable?

Answer 5

YES - Until accepted by the corporation; What does that mean? At what point are the corporation and the subscriber obligated under a subscription agreement? - When the board accepts the offer

Question 6

What must the corporation receive in return for issuance of stock?

Answer 6

Consideration -

Question 7

What are the two types of consideration that may be returned for issuance of stock?

Answer 7

1. Form

2. Amount

Question 8

With consideration what is (1) form?

Answer 8

1. Every state agrees that these are permitted: (1) money (cash or check), (2) tangible or intangible property, and (3) services already performed for the corporation
2. The split of authority is over two other forms. In some states these are OK and in some states they are prohibited (so using them results in “unpaid stock,” meaning it’s all treated as water): promissory notes, future services (If I see consideration for issuance of stock in this form, tell them that there is a split of authority)

Question 9

With consideration what is (2) amount?

Answer 9

1. Par means “minimum issuance price.” - e.g. C Corp. is issuing 10,000 shares of $3 par stock. It must receive at least $30,000, it could get more than $30,000, that is just the minimum
2. No par means “no minimum issuance price.” Board of directors sets a price.
3. Treasury stock. This is stock the company issued and then reacquired. It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
4. Let’s say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services? - The board must determine the value of the consideration (that valuation is conclusive if made in good faith)
5. On the bar exam, if they give you par stock, watch for watered stock. e.g. C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of “water.” Who is liable? - 1. Directors, if they knowingly authorized the issuance (they did they knew what par was and sold it for less, but say this) 2. X is also liable and has no defense, if you buy watered stock you are liable; 3. If X transfers the watered stock to a third party, that party is not liable

Question 10

What are preemptive rights?

Answer 10

Pre-emptive right is the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money (cash or its equivalent, like a check)

Question 11

When one has preemptive rights does “new issuance” include the issuance of treasury stock?

Answer 11

Split of authority here - If I have a preemptive rights quesiton - than I have to say there is a split
e.g. S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has the right to buy 600 shares; She owns 20% and so she can buy 20% of the new shares (she has the choice)

Question 12

If the articles are silent, do we have pre-emptive rights?

Answer 12

Split - Some states yes, some states no; watch out for the following hypo (type of question): Suppose the C Corp. articles provide for pre-emptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights? - NO, Because this is not an issuance for money $$, this deal is for property