Stock and Other Corporate Securities Flashcards
What is the difference between a creditor and a stockholder?
Creditors: hold the debt of corporation, entitled only to repayment of their loan plus interest.
Stockholders: entitled to ALL the value that remains in a corporation after debt has been paid.
What is preferred stock?
Has preference over common stock with respect to liquidation and dividend.s
What are the four types of shares?
Authorized Shares: maximum number of shares corporation can sell. Set in Articles and need shareholder approval to sell more.
Issues Shares: Number of shares sold.
Outstanding Shares: Number of shares that remain in possession of shareholders
Treasury Shares: shares reacquired by corporation.
What is par value stock?
A corporation may issue par value stock, but if it choses to, it must sell shares at mimim par value. Can be set a nominal value.
Can accept any valid consideration for stock.
Watered stock
- Shareholders who buy (lower value) will be liable to creditors.
What are stock subscriptions?
Ask people to agree in advance to buy stock before the corporation is formed.
Prior to incorporation: irrevocable for 6 months.
What are preemptive rights?
Right to acquire stock to maintain the percentage of ownership anytime new shares are issued.
Default Rule in most jurisdictions is that shareholders do not have preemptive rights unless negotiated or included in articles.
What are the two ways of distribution?
Board can declare a dividend or can buy back shares of corporation.
What is are the directors’ liability and authority for distribution?
Board has ability to authorize dividends, and shareholder have no right to them.
Board cannot declare dividends if insolvent or by doing so would become insolvent.
What is participating preferred shares?
You collect as a preferred and as a common shareholder.
What are cumulative preferred shares?
Gets share amount of last year and this year if no dividend the last year.
What are the two exceptions for a shareholder selling shares generally?
Closely-Held Corporations
Federal Causes of Action
What is the closely held corporation exception to selling shares?
Any restriction must be conspicuously noted on stock certificate or a statement saying that restriction provided upon request.
Test is if restriction is reasonable.
What are the federal causes of action exception to selling shares?
- Rule 10b-5 (Fraudulent purchase)
For a private person to commence action, must;
- purchased or sold security
- Transaction involved interstate commerce
- Defendant engaged in fraudulent or deceptive conduct
- Conduct related to material information
- Defendant acted with scienter (intentionally)
- Plaintiff relied on defendant’s conduct
- plaintiff suffered harm
Exceptions: opinion, prediction
Damages: out of pocket, no punative.
- Section 16(B) (insider trading)
What are the federal causes of action exception to selling shares?
- Rule 10b-5 (Fraudulent purchase)
For a private person to commence action, must;
- purchased or sold security
- Transaction involved interstate commerce
- Defendant engaged in fraudulent or deceptive conduct
- Conduct related to material information
- Defendant acted with scienter (intentionally)
- Plaintiff relied on defendant’s conduct
- plaintiff suffered harm
Exceptions: opinion, prediction
Damages: out of pocket, no punitive.
- Section 16(B) (insider trading)
- Corporate insider (director, officer, shareholder w more than 10% of any class of stock) forced to return profits to corporation when
- Corporations is traded on national securities exchange or has assets of over 10 million and more than 500 shareholders.
- Within 6 months
- buys and sells corporations stock.
