Stock & Dividend Distribution

Question 1

Stock Basics

Answer 1

Stock - provides control rights and a kind of ownership interest

Stock Class - most corps have one class of stock

Stock v. Debt - stockholders are entitled to what is left over after the liability of a corporation are paid; can stick around forever but debt holder only sticks till repaid

Stock Certificate - evidence of stock; any restriction on tranfer must be noted on the stock certificate itself

Question 2

Issuance of Stock - Authorized, Issued, and Outstanding Shares

Answer 2

Maximum Number - shares corporation wishes to authorize must be set in the articles of incorporation

Note - if directors want to sell more than this, they must propose an amendment to the articles

Issued - stock that has been sold and send out to the investor

Outstanding - stock that has been authorized, issued, and sold to investors

Treasury Stock - active authorized shares that were either acquired by the corp in a re-purchase from shareholders or paid as dividend on the existing treasury shares of the corp

Retire - to retire a share means to return it to the status of authorized but unissued

Unauthroized - shares not authorized in the articles and are void (any amount paid is recoverable by purchaser)

Question 3

Issuance of Stock - Consideration for Stock

Answer 3

Rule - stock can be sold for almost any consideration a corporation and buyer agree on including cash, property, and for past services performed

Future - stock in exchange for future services is permissible but is not considered paid for until completion of the service

Question 4

Issuance of Stock - Par Value

Answer 4

Definition - minimum price for which price can be sold

Application - only applie-s when the stock is initially sold by the corp and does not apply if one shareholder sells to another

Required? - no, stock need not have par value

Watered Stock - when corp recieves consideration below par value, stock is called this

Note - every shareholder, the oriignal and subsequent, of watered stock is liable to the corp’s creditors for the difference between the par value and the amount paid for the stock

Exception - the shareholder acquired the shares without actual knowledge that the shares were not fully paid for when initially purchased

Question 5

Issuance of Stock - Stock Subscriptions

Answer 5

During time when articles are filed but before directors elected, people may subscribe to purchase stock from corp when it comes into existence

Absent agreement, the subscriber does not have the unilateral right to cancel a subscription

Question 6

Issuance of Stock - Preemptive Rights

Answer 6

Defined - right to buy enough stock to maintain your ownership percentage in the corp if the corp sells more stock

Opting in vs opting out - for corp formed before march 17, 2000, preemptive rights are given to shareholders of any class with unlimited dividend or liquidation rights unless the articles of incorp state otherwise

for corp formed after this date, shareholder have preemptive rights only if the articles state these rights are given

Question 7

Issuance of Stock - Voting Agreements and Voting Trusts

Answer 7

Voting Pools/Trusts - shareholders are permitted to enter into voting pools and trusts

What are they? - agreements to vote according to the rules of the pool

Transfer - shareholders may transfer their stock to a voting trust but are limited to a 10 year term, but can be renewed

Question 8

Issuance of Stock - Federal Securities Act of 1933

Answer 8

Corp that issues stock or other securities may be required to register the security with the SEEC

Question 9

Dividend Distribution

Answer 9

Methods - distributions can be made to shareholders by paying out a payment or buying stock from shareholders

Note - unless restricted by articles, directors have broad discretion to make distributions

Limitations - not allowed to pay dividends if it is insolvent or if the distribution would cause it to become insolvent

Director Liability on Improper Distributions - if a director violated her duty of care or loyalty in approving the dividend, she is personally liable for any amount above the lawful distribution amount

Note - Recoupment - a director is entitled to repayment from other directors who have also violated their duties