Stock Issuance_Tnfr_Dist Flashcards
What is an issuance?
When a corporation sells its own stock
NOTE: Issuance is NOT when stock is sold in the SECONDARY mkt
What is a subscription?
Written, signed offer to buy stk from a corporation
When is a subscription revocable?
Pre-incorporation subscriptions
By PURCHASERS only after 3 MONTHS unless subscription provides otherwise OR all subscribers agree to let you revoke
Post-incorporation subscriptions
Revocable UNTIL corp accepts subscription offer (when BOD accepts offer)
Can a corporation decide to sell only to some subscribers and NOT others?
NO!
Must be uniform w/in each class or series of stock
What happens if a purchaser/subscriber defaults on pmt?
1) He pays LESS than 1/2 and fails to pay the rest w/in 30 DAYS of demand
(i) Can KEEP the money AND
(ii) Cancel the shares (they become a part of treasury stk)
2) He pays 1/2 or MORE and fails to pay rest w/in 30 DAYS of demand?
(i) TRY to sell stk to someone else for cash (or binding obligation to pay cash)
(ii - a) If no one buys, corp can (a) KEEP the money AND (b) cancel the shares into treasury stk
(ii - b) If new subscriber pays MORE than the remaining balance, the defaulting subscriber recovers the EXCESS (less expenses to resell)
What are the 5 permitted forms of consideration for stock issuance?
1) Cash & cash equiv.
2) Tangible or intangible property
3) Services ALREADY performed for the corp
4) Binding obligation to pay money or property in future (i.e. a promissory note)
5) Binding obligation to perform FUTURE services having an agreed value
What is unpaid stock?
Stock issued for NO consideration
It is treated as “watered stock”
What is the minimum issuance price for a series of stock?
PAR value
EXCEPTION: If stock is “No par”, then there is no minimum
Price is determined by the BOD, unless the certificate lets SHs do it (unlikely)
TREASURY STOCK can be treated as having “no par” ON RESALE (i.e. can sell treasury shs for ANY price)
Can a corporation acquire property by issuing par stock?
Yes; PROVIDED the form is worth at least the par value of the stock issued
Based on a BOD’s good faith determination
What is “watered stock” AND the consequences for a corporation issuing such stock?
Stock that is issued for LESS than the par value
Consequences: Corporation can sue for the “water” amt
Directors ARE liable IF they “knowingly authorized” the issuance
Direct purchaserIS liable (w/o a defense)
A 3d party purchaser from a direct purchaser is NOT liable if she acted in good faith (i.e. BFP that does not know abt the water)
What are pre-emptive rights?
Right of an EXISTING SH to MAINTAIN her % of ownership by buying stock (PRO RATA) whenever there is a NEW ISSUANCE for MONEY (cash/cash equiv)
Exists ONLY IF such rights are listed in the CERTIFICATE
“New issuance”
Does NOT include:
(i) sale of shs authorized by the orig. cert AND sold w/in 2 YRS of incorporation
(ii) sale of treasury stk UNLESS the certificate says it does
If new stk is sold for PROPERTY, then there are NO preemptive rights (issuance must be for money)
Is there a restriction on the amount of consideration req’d for a secondary sale of stock?
NO!
That concept ONLY matters for NEW stock issuance
When are stock transfer restrictions valid?
When they are “NOT an undue restraint on alienation”
OK: req’ing a sale of one’s stock to the corp once a SH dies
NOT OK: req’ing approval of the corp to sell stk
Any restriction MUST be in CERTIFICATE, BYLAWS or by AGMT
To be enforced against transferee, MUST
(i) be conspicuously noted on the stock cert.;OR
(ii) transferee has knowledge of restriction
When do SHs have a right to a stock distribution?
When the BOD declares it in its DISCRETION
Stock distribution =
(i) dividend;
(ii) pmt for repurchases; OR
(iii) pmt for redemption
A ct will interfere w/ a BOD’s discretion ONLY IF there is a showing of bad faith or dishonest purpose (high hurdle to cross)
BOD can’t declare if company is insolvent (or the distribution would render the company insolvent)
In what order are stock dividends paid?
FIRST: Preferred SHs→get dividends before common
“Participating”: means the preferred SHs get paid 2X: once as preferred SHs and second as part of common pool
“Cumulative”: means if there are arrears, the past due amts will be paid in FULL before common get pmt (relevant when BOD doesn’t declare a dividend)
SECOND: Common SHs→get paid after preferred shs
