Stock and Other Corporate Securities

Question 1

Common Stock

Answer 1

These shares arise when the corporation issues stock and does not set forth any special terms or conditions

Question 2

Preferred Stock

Answer 2

Comes with many rights and conditions like:

(1) Special voting rights
(2) Right to redeem or convert the shares at the corporation’s option and/or shareholder’s option
(3) Right to allow for distribution in any manner
(4) Right to have preference

Question 3

Issuing Shares of Stock: Authorization

Answer 3

Act of issuing shares must be authorized by the board of directors (unless specified otherwise in the articles of incorporation)

Corporation may not issue more shares than are authorized in articles of incorporation

Question 4

What happens if the firm issues unauthorized shares?

Answer 4

They are VOID

Purchaser can recover their money

Question 5

Issuing Shares of Stock: Consideration

Answer 5

Shares can be issued for any type of consideration

This includes cash, property, services, a promissory note, etc.

Determined by board of directors

Question 6

Issuing Shares of Stock: Stock Subscriptions

Answer 6

After the articles are filed, but before the directors are elected, a person may subscribe to purchase stock from the corporation when it comes alive

Irrevocable for 6 MONTHS unless all parties agree to revoke

Question 7

Preemptive Rights

Answer 7

Allow shareholders to purchase newly issued share in order to maintain a proportional share of ownership in the corporation

Indiana corporation will NOT have preemptive rights to shares unless the articles of incorporation EXPRESSLY PROVIDE these rights

Right may be waived

Question 8

Rights to Acquire Stock

Answer 8

Allows board of directors to create “poison pill” that can thwart a corporate takeover if the board is acting in the best interests of the corporation

Question 9

Federal Securities Registration

Answer 9

Required for public offerings of stock

Corporation must file registration statement with SEC and provide buyer with a prospectus

Question 10

Distributions

Answer 10

Board of directors authorized to make distributions

Usually in the form of cash dividend payment

Question 11

Distributions: Record Date

Answer 11

Typically, the directors will set a record date and everyone owning the shares on that record date will receive the distribution

Question 12

Distributions: Power to Compel

Answer 12

Shareholders can generally NOT compel board to authorize a distribution

In that case the shareholders may seek a court order compelling the distribution

Question 13

Distributions: Insolvent Corporations

Answer 13

CANNOT make distribution if corporation is insolvent or if the distribution would make the corporation insolvent

DOES NOT APPLY TO STOCK DIVIDENDS

Question 14

Liability for Unlawful Distributions

Answer 14

Director personally liable to corporation for amount in excess of a lawful amount

Director entitled to contribution from other liable directors

Director may recoup payments from any shareholder (on a pro rata basis) who knowingly accepts unlawful distribution

Question 15

Solvency Rules and Stock Dividends

Answer 15

Solvency rules DO NOT apply to stock dividends, only distributions