Securities

Question 1

Issuance

Answer 1

Issuance of stock must be authorized by the board of directors.

Question 2

Valuation of consideration

Answer 2

A corporation can receive any valid consideration that the board of directors in its discretion deems adequate—e.g., labor rights or IP rights—in exchange for stock.

Question 3

Valuation of consideration: par value and watered stock

Answer 3

A corporation may—but is not required to—issue stock at a par value.

If it does, it must sell the shares for at least the minimum par value amount.

If a corporation sells stock for less than the par value, the shareholders who bought the below par value stock (“watered stock”) are liable to the creditors of the corporation.

Question 4

Priority of distribution: preferred stock

Answer 4

Preferred shares receive dividends at the preferred rate before dividends are distributed to common stock holders.

Question 5

Priority of distribution: participating preferred shares

Answer 5

Participating preferred shares receive priority dividends at the preferred rate and can participate in the common share distribution.

Question 6

Priority of distribution: cumulative preferred shares

Answer 6

Cumulative preferred shares receive distributions both for the current distribution period and prior ones, if no dividends were paid in prior distribution periods.

Question 7

Rule 10b-5 actions

Answer 7

For a private person to sustain a Rule 10b-5 action, she must establish that:

(1) She has purchased or sold the security;
(2) The transaction involved interstate commerce;
(3) The defendant engaged in fraudulent or deceptive conduct (i.e., not opinions or predictions):
(a) Making an untrue statement of a material fact; or
(b) Failing to state a material fact that is necessary to prevent statements already made from being misleading;
(4) The conduct related to material information—i.e., information that a reasonable investor would find important in deciding whether to purchase or sell the security;
(5) The defendant acted with scienter: intentionally or recklessly;
(6) The plaintiff relied on defendant’s conduct; and
(7) The plaintiff suffered harm caused by the conduct.

Question 8

Rule 10b-5 actions: damages

Answer 8

A plaintiff can recover out-of-pocket damages: the difference between the stock’s value and the price the plaintiff paid or received.

No punitive damages are allowed.

Question 9

Section 16(b) short-swing trading: eligible transactions

Answer 9

Section 16(b) applies to transactions:

(1) In securities of corporations:
(a) traded on a nationals securities exchange; or
(b) With assets in excess of $10 million and with more than 5 million shareholders;
(2) By corporate insiders:
(a) Directors, officers, or shareholders who hold more than 10 percent of any class of stock; or
(b) Officers: presidents, vice presidents, secretaries, treasurers, comptrollers, etc.
(3) Made after someone becomes a corporate insider.

Question 10

Section 16(b) short-swing trading: liability

Answer 10

A corporate insider can be forced to return short-swing profits to the corporation, regardless of the motivation, if she both buys and sells the corporation’s stock during any six-month period.

Corporate insiders must report changes in stock ownership to the SEC.