Pg 37

Question 1

What does it mean for stock to be validly issued?

Answer 1

Directors must approve issuance and set the type and amount of consideration

Question 2

What are the two approaches to determine if stock was validly issued?

Answer 2

• Delaware approach

– MBCA

Question 3

What is the Delaware approach to determine if stock was validly issued?

Answer 3

Consideration for shares is paid in whatever formed the directors determine. This can be: cash, services, personal or intangible property, leases of real property, or any combination. In 2004 there was an amendment that said that it can be for future services and promissory notes, forgiveness of debt, or any benefit to the corporation.

Question 4

What is the MBCA approach to whether stock has been validly issued?

Answer 4

It can be from tangible or intangible property, cash, promissory notes, services, contracts for services to be performed, other securities of the corporation, forgiveness of or reduction in corporate liability, release of a claim against the corporation, benefit from the corporation giving shares to a charitable organization, etc. This includes anything that is a benefit to the corporation.

Question 5

What does it mean for stock to be fully paid?

Answer 5

The full amount of consideration was paid to the corporation

Question 6

If a corporation issues whole or part shares as partly paid and subject to call for the remainder of the consideration to be paid later, what is the approach?

Answer 6

• it must be stated on the back of each stock certificate or on the books of the corporation with the total amount of consideration already paid and what is still remaining
• when the dividends are issued, the corporation just pays based on a percentage of the consideration actually paid

Question 7

What does it mean for stock to be nonassessable?

Answer 7

The shareholder cannot be required to pay more for the shares and the shareholder has no further obligation to the corporation regarding the corporation’s obligations. He is just liable for consideration paid for the shares, which is limited liability

Question 8

What is capitalization?

Answer 8

The process that a corporation raises money to get funds that it needs to do business. This can happen through stocks or bonds.

Question 9

What is the difference between stocks and bonds?

Answer 9

Bonds are debt and stocks are equity

Question 10

What are things that a corporation considers when it is thinking about capitalization?

Answer 10

• raising money at the lowest cost
  – tax advantages of different securities
  – keeping control in organizers without them having to invest a lot in the corporation
• ability of the company to meet fixed financial charges when its income fluctuates

Question 11

If there’s only one class of stock, what kind is it?

Answer 11

Common stock

Question 12

How do you determine equity?

Answer 12

You take the market value of the property minus the market value of the debts or liens against the property

Question 13

What are the things that make up equity capital?

Answer 13

– contributions of original entrepreneurs in the firm
– capital by later investors in exchange for ownership interests
– retained earnings of the business

Question 14

What is a bond?

Answer 14

A debt with a maturation of one year or more that is secured by a lien or a mortgage on corporate property. Bondholders do not acquire any ownership interest in the corporation, they just become a creditor of the corporation with a tradable promissory note. A bond is an unconditional promise of the company to pay the stated amount in the future and to make interest payments periodically until then. Usually these are long-term. This is corporate debt