Kaplan Pgs 300-325 Financing and Management

Question 1

What is an equity security?

Answer 1

This represents the capital of the corporation. These holders have no right to repayment or to return on the investment, but on liquidation, once the creditors have been satisfied, all remaining corporate assets belong to the shareholders.

Question 2

What are the three major rights of shareholders?

Answer 2

• dividend rights: right to a dividend if one is declared
  – liquidation rights: right to a share of the corporate assets at the end of a corporation’s existence
  – voting rights: right to have a voice in corporate management

Question 3

What is a good and the bad involved in common stock?

Answer 3

That’s good: they have potentially unlimited return on their investment
– bad: they take the greatest risk of losing their investment. They also have no right to a dividend unless one is declared

Question 4

What is the difference between cumulative and non-cumulative dividends for preferred stock?

Answer 4

– CUMULATIVE: the right to get a stated amount each year, regardless of whether earnings are sufficient to pay it. If it is not paid one year, the amount is added to the next year and cumulates until it is paid. No dividends are paid on the common stock until all cumulative preferred dividends are paid.
– NON-CUMULATIVE: the shareholder is entitled to a dividend only if and when one is declared by the board. If the board fails to pay, that does not increase the amount for the next year. But the preferred stockholder still has a right to a dividend before common stock does

Question 5

What are the rules for treasury shares?

Answer 5

– Even though they are no longer outstanding, they are still considered issued stock, so the re-purchase does not empower the directors to issue additional stock
– they could be cancelled or restored to an issued share status
– they have no voting, liquidation, or dividend rates

Question 6

What is stated capital?

Answer 6

The money received from the issuance of par value stock

Question 7

Presently are there any statutory provisions that require that stock has part value question

Answer 7

No, so there is no minimum price at which specific shares must be issued

Question 8

What is consideration for stock?

Answer 8

Dash money
– property
– services

Question 9

How are the shares of the corporation represented?

Answer 9

By stock certificates which are just tangible evidence of stock ownership

Question 10

What is a dividend question

Answer 10

A distribution by a corporation to its shareholders of cash, property, or corporate stock

Question 11

Do shareholders have an inherent rights to be paid a dividend question

Answer 11

No

Question 12

Who has discretion with regard to dividend payment question

Answer 12

The board of directors decide whether and when to declare a dividend.

Question 13

What are situations when the board cannot declare a cash dividend?

Answer 13

Dash if the corporation is insolvent
– if payment of the dividend would render the corporation insolvent
– if paying it would contravene restrictions in the articles

Question 14

What is the situation when a shareholder can use the courts to compel a dividend question

Answer 14

If the shareholder can show that the directors refusal to declare one was the result of fraud, bad faith, or an abuse of discretion

Question 15

Once a dividend has been declared, what is the relationship that arises?

Answer 15

A debtor/creditor relationship arises between the corporation and the shareholders, and the funds are considered to be segregated from other corporate funds. The shareholders and then enforce his dividend rate as a creditor

Question 16

What happens to dividends that are owed to shareholders who don’t bother to get them?

Answer 16

They are considered to be abandoned if the shareholder doesn’t claim them within three years or doesn’t respond in writing about them. The unclaimed property then escheats to the state and the corporation has no more liability with regard to it

Question 17

What happens if directors vote to authorize a dividend that is in violation of the corporations articles of incorporation or the corporation is insolvent?

Answer 17

The directors are jointly and severally liable for the amount of the dividend in excess of the amount that could have legally been paid, or for whatever amount is not repaid to the corporation

Question 18

What is involved in the good faith exception for directors making decisions about paying dividends?

Answer 18

If they were lied and acted reasonably and in good faith on corporate financial records, they are not liable

Question 19

If a shareholder get a dividend for a company that is insolvent or if the dividends payment made the company insolvent, what happens?

Answer 19

He is liable to the corporation for the amount of that dividend plus interest as long as he had some knowledge of the impropriety of the distribution

Question 20

What is redemption?

Answer 20

When a Corporation has the right to compel a shareholder to sell his shares back to the corporation

Question 21

What are the roles of shareholders?

Answer 21

Dash elect and remove directors
– amend bylaws
– approve fundamental changes to the corporation: amend articles of incorporation, murder, sale of substantially all assets, dissolution
Ratify actions of the Director if there’s a conflict of interest

Question 22

Where are shareholder meetings usually held?

Answer 22

At the corporations principal executive office

Question 23

What are the rules about when annual shareholder meetings must be held?

Answer 23

If one is not held within 60 days after the designated date, or if there is no designated date, within any 15 month period, any shareholder can apply to a court for a summary order that the meeting be held

Question 24

When can a special shareholder meeting be called?

Answer 24

• by the president
• by the directors
• through the written application of the holders of 10% of the shares that are entitled to vote

Question 25

What are the rules with regard to notice for shareholder meetings question

Answer 25

There must be written notice that says the place, date, and our, as well as the purposes and agenda sent to each shareholder that is entitled to vote by first class mail, unless the corporation has 500 or more outstanding shares, then it can be third class mail. This must happen at least 10 days and no more than 60 days before the meeting

Question 26

What is the record date?

Answer 26

The date on which a person must own stock in order to be able to vote at a meeting (between 10-60 days before meeting).

Question 27

What is a general rule for how many votes each share gets question

Answer 27

One vote to one share, and each fractional share gets a proportional vote

Question 28

What happens with jointly own stock and voting?

Answer 28

It can be voted by either co-owner, but if the co-owners disagree and each one tries to vote, neither vote is count

Question 29

What happens when a stock is owned by it a partnership with regard to voting question

Answer 29

They can be voted by any partner, but if there is a disagreement, it is voted under the terms of the partnership

Question 30

What happens with stock that is owned by a corporation with regard to voting question

Answer 30

I can be voted by any officer or agent or as the Board of Directors determines

Question 31

If there are staggered terms for the election of directors in California, what is the rules about the authorize number of directors?

Answer 31

Dash if the board is divided into two classes: the authorize number of directors can be no less than six, and you need 1/2 of the directors elected to each annual meeting of shareholders
– if the board is divided into three classes: the other is number of directors can be no less than nine, and you need 1/3 elected and each annual meeting

Question 32

What is the rule for cumulative voting in California?

Answer 32

It is mandatory if any shareholder demands the right to vote that way

Question 33

Proxies are usually considered to be revocable unless what two things are present?

Answer 33

– the instrument specifically says otherwise

– it is coupled with an interest

Question 34

Do proxies have to be in writing question

Answer 34

Generally yes, but California also allows electronic transmission instead of a signed written authorization, and orally on the telephone as long as it’s given with information to determine that the proxy was authorized

Question 35

What is the amount that a stockholder must own of outstanding shares in order to not be denied the right of access to the shareholder list question

Answer 35

5%

Question 36

What is the rule in California with regard to how many directors there must be for a corporation question

Answer 36

There must be a minimum of three unless there are less than three shareholders, then the number of directors must not exceed the number of shareholder

Question 37

If the time in place of meetings are fixed by the bylaws, is it necessary that notice be given question

Answer 37

No

Question 38

If a special meeting is going to be held regarding just the Board of Directors, what is the requirement for notice?

Answer 38

• if by mail: 4 days

– if personally delivered, by telephone, or electronic means: 48 hours

Question 39

What is the number generally to create a quorum, and what is the absolute minimum required to make a quorum?

Answer 39

Dash usually: it is the majority of directors

– a quorum can never be less than 1/3 of the directors or fewer than two, which ever is larger

Question 40

Can directors vote by proxy?

Answer 40

No, if he is to vote, he must be present at the meeting. But he can participate by conference telephone as long as everyone in the meeting can hear each other

Question 41

What is the role of the president of a corporation question

Answer 41

He is a general manager and chief executive officer with the apparent authority to do any act on behalf of the corporation that is performed in the usual an ordinary course of business

Question 42

Does a CFO have the authority to bind the corporation question

Answer 42

No

Question 43

Is it possible for directors to delegate some of their duties to officers?

Answer 43

Yes, for example the board can give the president general charge of the business, which can include the power to increase the compensation of certain employees, authorize suit against the directors in the name of the corporation, etc.

Question 44

How can ratification occur that is explicit and that is implied?

Answer 44

– explicit: by passing a resolution that confirms the transaction
– implied: by accepting the benefits of the agreement