Issuance of stock

Question 1

Issuance of stock background

Answer 1

to start and operate a corporation we need money (capital). The corporation can either borrow the money or raise it by selling stock. Either way the corporation will issue a security to a person.

a. Debt securities: here the corporation borrows money from X and agrees to repay with interest. Debt securities are usually called a bond. The person holding a bond is a creditor not an owner.
b. Equity securities: here the corporation sells an ownership interest to X. Equity securities are called stock. The person holding stock is an owner not a creditor.
ii. Stock subscriptions – promises from subscribors they will buy stock in the corporation.

1. Preincorporation subscriptions are irrevocable for 6 months unless all subscribers consent.
2. Payment upon demand.

Question 2

What is issuance of stock

Answer 2

a. Corporation sells its own stock.
b. Issuance = sale.
c. Rules in this fact pattern apply ONLY when there is an issuance. This means they apply only when corporation is seling its own stock

Question 3

Subscriptions

Answer 3

(written offers to buy stock from corporation)

pre-incorporation subscription are
3. Unless it says otherwise or all subscribers agree to let you revoke

b. Post incorporation subscriptions ARE revocable until the corporation accepts your offer to buy

Question 4

Consideration– form of consideration

Answer 4

what must the corporation receive when it issues stock

a. Form of consideration
i. Stock or an option to buy stock may be issued for any tangible or intangible property or benefit to the corporation. Includes money, property and services already performed for the corporation, discharge of debt.
1. Includes promissory notes and future services to the corporation

Question 5

Consideration– amount of consideration

Answer 5

b. Amount of consideration
i. Par means minimum issuance price.
1. For ex c corporation issues 10k shares of $3 par stock. Must receive at least 30k
2. Could it get more than 30k? yes!

ii. No par means no minimum issuance price
1. This means the board can have the stock issued for any price it sets

iii. Treasury stock—this is the stock the company issued and then reacquired. It is considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants.

Board determination of how much stock should be granted in exchange for property or services–> conclusiveif made in good faith.

v. watered stock.
1. C corporation issues 10k shares of $3 par to X for $22k. The corporation wants to recover 8k of “water.” Who is liable?
a. Directors are liable if they knowingly authorized the issuance.
b. The guy who bought the stock is also liable – no defense. He is charged with notice of the par value
c. If X transfers the stock to a 3rd party the 3rd party is not liable if she didn’t know about the water
d. But if I own 10 shares of $3 par stock of X corporation, I can of course sell it to 3rd party for less than par value

Question 6

Pre-emptive right

Answer 6

a. This is the right of an existing shareholder of common stock 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)
i. “new issuance” DOES INCLUDE the issuance of treasury stock
1. some states say no
b. If the articles are silent, no preemptive rights
i. Only have them if the articles say so.
1. They only apply IF THE NEW ISSUANCE IS FOR MONEY – not other things like property