Stock and Other Corporate Securities

Question 1

Equity/Debt

Answer 1

• Equity: ownership interest
• Deb: obligation corp. owes, must repay to a 3rd party.
• Equity: unlimited upside, bears burden of all corp’s loss
• Debt: limited upside (principle+interest), preference over equity holders in a liquidation.

Question 2

Common Stock; Preferred Stock

Answer 2

-Preferred Stock: treated better than common (preference in dividend payments and liquidation) paid after debt holders but before common.

Question 3

Issuance of Stock

Answer 3

• Authorization: charter, # of shares authorized to issue.
• board must authorize issuance of stock.
• Stock authorized, not issued=authorized but unissued.
• Stock corp. sold is, authorized, issued, and outstanding.
• Stock corp. repurchased, authorized by unissued.

Question 4

Consideration

Answer 4

• anything the board has authorized.

- Par value: value specified in articles of incorporation.

Question 5

Stock Subscriptions

Answer 5

• agreement to buy the stock of yet to be formed corp.
• preincorporation, irrevocable for 3 months
• post incorporation freely revokable until board accept

Question 6

Stock Rights, Options, and Warrants

Answer 6

Board issue rights, options, warrants to buy corp’s stock

Question 7

Stockholders’ Preemptive Rights

Answer 7

• existing stockholders buy enough of new issuance to keep % of ownership.
• MD exists if corp. expressly gives in charter

Question 8

Distributions

Answer 8

• payment/dividend stockholders
• Limitation: Corp. can’t make distribution if it will render comp. insolvent or if already insolvent.
• MD two tests:
• equity: corp. can’t pay debt as they come due
• Balance sheet: corp’s liability exceed the value of assets

Question 9

Director’s Liability for Unlawful Distribution

Answer 9

• Yes if breaches duty of care/loyalty

- Liable for difference btwn a lawful and the unlawful distribution.

Question 10

Company Buys Back

Answer 10

• corp. issues more stock to its stockholders.

- Not a distribution

Question 11

Issuance of Stock

Answer 11

• Issuance: public companies comply w. fed. law.

- Private placements: typically institutional or sophisticated investors

Question 12

Sale of Stock

Answer 12

• stockholder sell any time
• statutory or consensual restrictions on sale of stock
• restrictions: transfer restrictions imposed on stockholders (validity reasonableness test) and fed. securities law if registered.
• Directors and officers can be subject to misdemeanor sanctions if they authorize an unauthorized sale of stock.

Question 13

Federal Causes of Action (Securities Exchange Act)

Answer 13

• 1933 securities act deals with issuance of stock from company
• 1934 securities exchange act deals with secondary market
• rule 10b-5 applies to public and private companies. jx requirements is plaintiff purchased or sold a security and transaction involved use of interstate commerce. Fraud or deceptive conduct or conduct must relate to material information, d must act with intent or recklessness; plaintiff must have relied on d’s conduct, and harm or injury to plaintiff.
• section 16(b) apply to public companies when an insider trades during a 6 month period and trading (buy and sell stock within a six month window)