Stock and Other Corporate Securities

Question 1

What are the two types of stock

Answer 1

common and preferred

Question 2

Define

Common Stock

Answer 2

a basic ownership interest that entitles the owner to vote on corporate governance matters

Question 3

Define

Preferred Stock

Answer 3

has preference over other stock with regards to distributions

Question 4

What is authorization for the issuance of stock

Answer 4

authorization is made by the board of directors and/or shareholders

Question 5

What kind of consideration is there for the issuance of stock?

Answer 5

any adequate consideration means the stock is deemed fully paid and non-assessable

Question 6

What is a stock subscription?

Answer 6

a pre-incorporation subscription that is irrevocable for six moths from the date of subscription (unless subscribers agree to revocation)

Question 7

Can the board of directors issue stock rights, options and warrants?

Answer 7

Yes

Question 8

What are stockholder preemptive rights?

Answer 8

the right of a shareholder to purchase newly issued shares in order to maintain the shareholder’s proportional ownership share as provided by the articles, a waiver of preemptive rights in writing is irrevocable

Question 9

What are securities registration?

Answer 9

required for public offerings of stocks
Corp must file a registration statement with the SEC and provide the buyer with a prospectus

Question 10

Is the board of directors authorized to make distributions?

Answer 10

yes, this is usually in the form of dividends

Question 11

What limitations are there on distributions?

Answer 11

1) cannot distribute if Corp is insolvent
2) cannot distribute if disribution would make Corp insolvent

Question 12

What liability is there for unlawful distributions?

Answer 12

Directors who authorized unlawful distributions are personally liability to Corp for the amount in excess of a lawful amount

Question 13

When can a shareholder compel a distribution?

Answer 13

1) by proving the existence of funds legally available, and
2) Director acted in bad faith for refusing to pay the distribution

Question 14

When are private restrictions of sale enforceable?

Answer 14

1) the security must be certified
2) restriction must be conspicuously noted on the security certificate, and
3) the person must have knowledge of the restriction

Question 15

What is the standard for a challenge to a restriction on transfer of stock?

Answer 15

the test is one of reasonableness

Question 16

What are the two kinds of federal causes of action?

Answer 16

1) Rule 10b-5 action - fraudulent purchase or sale
2) Rule 16(b) action - insider trading

Question 17

What is required for a 10b-5 action (Fraudulent purchase or sale)

Answer 17

1) the plaintiff purchased or sold security
2) use of interstate commerce
3) the Defendant’s fraudulent/deceptive conduct (untrue statement of material fact, failure to prevent misleading statements, or insider trading)
4) martiality
5) Scienter
6) Justifiable reliance of Defendants fraudulent conduct
7) harm to plaintiff

Question 18

For a 10b-5 action, define materiality

Answer 18

a reasonable investor would find the fact important in deciding whether to purchase or sell security

Question 19

Define scienter in a 10b-5 action?

Answer 19

the defendant must make the statement intentionally or recklessly

Question 20

What are the elements of a 16(b) action (insider trading)

Answer 20

1) publicly traded Corps
2) Corporate Insiders
3) Short-swing profits
4) SEC report of change in stock ownership

Question 21

When is a corporation Publicaly traded?

Answer 21

must have securities traded on a national securities exchange or have assets of more than $10 million and more that 500 Shareholders

Question 22

What are the requirements for Corporate Insiders for a Rule 16(b) action?

Answer 22

directors, owners, or shareholders with more than 10% of stock

Question 23

What are the requirements of short-swing profits for a 16(b) action?

Answer 23

a corporate insider both bought and shold Corp’s stock during any six month period