Stock and Other Corporate Securities Flashcards
What is the difference between common stock and preferred stock?
Preferred stock has preference for distributions
When can stock be sold?
Only if listed in the articles of incorporation as authorized shares
Does the board have the authority to determine the number of shares of any class of stock?
Yes, unless restricted by the articles
What consideration can pay for shares of stock?
- Cash;
- Property;
- Promissory notes;
- Services to the corporation;
- Future services; or
- Other shares of stock or securities
What is par value?
The minimum value assigned to the stock by the AOI (not required).
Does par value need to be FMV?
No; it can be nominal
What consideration is adequate for par value stock?
Anything the board finds is adequate
If a shareholder fails to pay consideration for stock, what may the corporation do?
The shareholder is liable to the corporation, and if such stock has been issued, it may be canceled
Are pre-incorporation stock subscriptions revocable?
No, unless the consent of all subscribers is obtained
When are post-incorporation stock subscriptions revocable?
At any time before acceptance by the board
When do shareholders have a preemptive right to purchase voting shares?
- In a statutory close corporation, unless the bylaws provide otherwise
- In a corporation, if expressly listed in AOI
Can shareholders force distributions?
No, unless a court orders it for abuse of discretion by the board
Who authorizes distributions?
The board, unless restricted by the bylaws
When may a corporation NOT make distributions?
If the corporation is insolvent or if the distribution would cause the distribution to be insolvent
What are the two tests for corporate insolvency for purposes of distributions?
- Equity insolvency test
2. Balance-sheet test
What is the balance-sheet test?
A corporation’s total assets must exceed its total liabilities, plus liquidation preferences of senior securities
What is the equity-insolvency test?
A corporation must be able to pay off its debts as they come due in the ordinary course of business
What is the relevant period of time for measuring insolvency for purposes of distributions?
The date the divided is declared, or the date the purchase price is paid for a stock purchase
When are directors liable for unlawful distributions?
Directors are personally liable for violating the duties of care or loyalty to the corporation for the amount of the distribution in excess of a lawful amount
From whom can a director seek contribution if they are also liable for an unlawful distribution?
- Other directors; or
2. Shareholders that knowingly accept unlawful distributions
What is outstanding stock?
Stock authorized and issued by the corporation
When may a shareholder sell her stock?
Generally always, unless:
- Limited as a shareholder of a closely held corporation; or
- if restricted by penalties imposed on transactions that violate federal securities laws
How may owners of a closely held corporation restrict the number of shareholders?
- Outright prohibition on transfers;
- Transfers requiring consent from the corporation or shareholders;
- Options;
- Rights of first refusal;
- Right to buy back; or
- Buy-sell agreements
When are stock transfer restrictions unenforceable?
When unreasonable, but may be justified by the particular circumstances
What are the elements of a Rule 10b-5 action?
A private person may sue under 10b-5 if:
- Purchased or sold a security;
- used in interstate commerce;
- from a defendant engaged in fraudulent or deceptive conduct;
- that the plaintiff relied on;
- Suffering harm as a result
When would a transaction not satisfy the interstate commerce requirement for a Rule 10b-5 action?
Face-to-face transactions
Is insider knowledge sufficient to give rise to Rule 10b-5 liability?
No, unless the insider also trades stocks or other securities on the basis of such knowledge
What are the four types of traders who may be liable under Rule 10b-5 for a failure to disclose information?
- Insiders
- Constructive insiders (lawyers, etc.)
- Tippees who have knowledge of the insider’s violation
- Misappropriators who use confidential information
What is the scienter requirement for a Rule 10b-5 action?
Intentionally or recklessly
What damages are available for a Rule 10b-5 plaintiff?
“out of pocket” losses, i.e., the difference between the stock’s value at the time of the fraud and the price plaintiff paid
No punitives
What are the elements for a Section 16(b) action for the return of short-swing profits to a corporation?
- The plaintiff must be a corporation trading on a national securities exchange and with assets of $10M or more AND more than 500 shareholders
- The defendant must be a corporate director, officer, or shareholder with more than 10% of stock; and
- During a six month period, any insider who buys and sells the corporation’s stock is liable for any profits made
