Issuance of Stock/Funding

Question 1

Two forms of funding

Answer 1

Debt Securities or Equity Securities

Question 2

What are Debt Securities and the different types?

Answer 2

When a corporation borrows money from a creditor, who in exchange receives payment back + interest.

A bond is usually secured.

A debenture is usually an unsecured loan.

Question 3

What are equity securities?

Answer 3

An investor buys ownership interest in a corporation and in return, it receives

Question 4

What are equity securities?

Answer 4

When an investor purchases an ownership interest in the a corporation, that ownership interest is an equity security.

Unlike debt equities, they are owners, not a creditor.

Question 5

Authorized Shares versus Treasury Shares

Answer 5

Authorized shares are the number of shares issued and outstanding.

Whereas treasury shares (AKA authorized but unissued) are shares that the corporation reacquired through repurchase or redemption.

Question 6

How does the classification of stocks effect ownership rights?

Answer 6

If there is only one classification, all owners have equal interest in each share.

However, if there are multiple classifications, those classifications may alter the ownership, right to distribution, and voting powers. When different classifications exist, recall that the AOI must include a description and number of each class.

Question 7

What is an issuance?

Question 8

What is an issuance?

Answer 8

When a corporation sells its own stock.

Question 9

What are subscription and what is a common issue with a subscription?

Answer 9

A subscription is a contract to purchase stock from a corporation (can be prior to or after incorporation).
The most common issue is whether the subscription contract is valid.

Question 10

What are subscription and what is a common issue with a subscription?

Answer 10

A subscription is a contract to purchase stock from a corporation prior to incorporation.

The most common issue is whether the subscription contract is revocable.

Question 11

How does MBCA handle preincorporation subscriptions?

Answer 11

Unless otherwise provided in the terms of the agreement, subscription are irrevocable for six months.

Question 12

What is a Demand for payment under a subscription?

Answer 12

Payment for a subscription (contract to purchase share prior to incorporation) can be made at any time by the board, but may not be done in a discriminatory manner.

Failure to pay may result in penalization by selling the shares of forfeiting the subscription, and any amount paid on the subscription, at the corporations option.

Question 13

What is a Demand for payment under a subscription?

Answer 13

Payment for a subscription (contract to purchase shares) can be made at any time by the board, but may not be done in a discriminatory manner.

Failure to pay may result in penalization by selling the shares of forfeiting the subscription, and any amount paid on the subscription, at the corporations option.

Question 14

Are post-incorporation subscriptions revocable?

Answer 14

Yes, until the board accepts the subscription. Then the offeror and corporation are bound.

Question 15

What is the consideration for a subscription contract?

Answer 15

In exchange for shares of a company, a corporation may accept any tangible or intangible property or benefit to the corporation.

This may include (but not limited to):
1. Money (cash or check)
2. Property
3. Services already rendered
4. Discharge of debt.

Question 16

Has the MBCA changed what can be accepted as consideration for a subscription?

Answer 16

Yes - the MBCA expanded consideration to include promissory notes, promises of future services/work, and promises to convey property in the future.

Question 17

What is the required value for consideration?

Answer 17

If par value is set, it must equal the par value. If there is no par value, then the board can set whatever issue value they wish.

Question 18

What is par value

Answer 18

Par value is the value of a stock to be issued, which is set in the AOI. An absence of par value means that there is no minimum and the board can set whatever price they want.

Question 19

Watered Stock

Answer 19

When a par value is set, and a stock was issued for less than par.

Question 20

Who is liable for the value of Watered Stock?

Answer 20

Generally, the buyer is liable because they should have notice of par value.

Question 21

What are shareholders preemptive rights?

Answer 21

1. In a closely held corporation,
2. when the corporation issues new shares in exchange for money (cash or equivalent)
3. A shareholder has the right to purchase additional shares to maintain their percentage of ownership.

Note: When a corporation issues new shares (diluting another shareholders percentage of ownership) in exchange for consideration that is not money, preemptive rights will not apply.

Question 22

Limitations to Preemptive rights?

Answer 22

They will not apply if:

Question 23

Limitations to Preemptive rights?

Answer 23

They will not apply if:
1. Not stated in the Articles of Incorporation
2. Newly issued stock is in exchange for consideration other than cash
3. New issuance occurs within 6 months of incorporation, and
4. shareholder has not voting rights but has distribution preference.