Stock and Other Corporate Securities Flashcards
What are the two types of stock?
Common stock
-> a basic ownership interest that entitles the owner to vote on corporate governance matters
Preferred stock
-> has preference over other stock with regards to distributions
How does issuance of stock work?
-> who authorizes it
-> is consideration needed
Authorization of stock by
-> board of directors (BD)
AND/OR
-> shareholders (SH)
Consideration is required but can take the form of tangible goods, intangible goods, or services
-> if consideration is adequate, the stock is deemed fully paid and non assessable
What is a stock subscription?
How can a stock subscription be revoked?
Prior to incorporation, persons may subscribe to purchase stock from the corporation when it comes into existence.
A pre-incorporation subscription is irrevocable for SIX months from the date of subscription
-> UNLESS all subscribers agree to a revocation
What else can the board of directors issue with regards to stocks?
Stock rights
Options
Warrants
What is a SH’s preemptive rights?
Is waive of the right revocable?
The right of a SH to purchase newly issued shares in order to maintain the SH’s proportional ownership share as provided by the articles.
Waiver of preemptive rights in writing is irrevocable.
When issuing stocks in a public offering, what is required to comply with securities regulations?
The registration of securities is required for public offerings of stock AND C must file a registration statement with SEC and provide the buyer with a prospectus.
Who is a distribution?
Who is authorized to make these?
It is the transfer of cash or other property from a corporation to one or more of its shareholders.
-> most common distribution is a dividend (cash payment to SHs)
The board of directors is authorized to make them, usually in the form of cash dividend payments.
When is a distribution not allowed?
C cannot distribute anything if C is insolvent OR if the distribution would make C insolvent.
What duty has D breached if unlawfully making a distribution?
Are they personally liable and to who?
D’s liability for unlawful distributions in violation of duties of care/loyalty.
D is personally liable to C for the amount in excess of a lawful amount.
When is a SH able to Sui to compel distributions?
SH can sue to enforce his individual right by proving the existence of duns legally available to pay a distribution and D’s BAD FAITH for refusing to pay the distribution.
Is a private restriction on the sale of a security enforceable?
What test is used to challenge a restriction on the transfer of a stock?
It is enforceable if
-> the security is certified
-> the restriction is conspicuously noted on the security certificate
AND
-> the person must have knowledge of the restriction
Test of reasonableness.
What is a Rule 10b-5 action?
It’s a federal action in which there has been a fraudulent purchase or sale of any stock or other security (e.g. bonds, stock options, and warrants).
What are the requirements of a 10b-5 action for a private person to bring the action?
The requirements are
-> the plaintiff purchased or sole the security
-> the transaction involved the use of interstate commerce
-> the defendant engaged in fraudulent or deceptive conduct
-> the conduct related to material information
-> the defendant acted with scienter (i.e., with intent or recklessness)
-> the plaintiff relied on the defendant’s conduct
AND
-> the plaintiff suffered harm because of the defendant’s conduct
Under 10b-5
-> how can one prove D’s fraudulent/deceptive conduct?
-> what does it mean for the conduct related to material information?
Prove with
-> untrue statements of material fact,
-> failure to prevent misleading statements
OR
-> insider trading
Materiality means
-> a reasonable investor would find the fact important in deciding whether to purchase or sell a security
What is a 16-b action?
It’s an action where a corporate insider can be forced to return short-swing profits to the corporation through a section 16(b) action.
