Stock Issuance_Tnfr_Dist Flashcards
What is an issuance?
Issuance occurs when a corporation sells its own stock NOTE: an issuance is NOT when stock is sold in the SECONDARY mkt
What is a subscription?
A subscription is a written, signed offer to buy stk from a corporation
When is a subscription revocable?
Pre-incorporation subscriptions: are irrevocable by PURCHASERS for 3 MONTHS unless the subscription provides otherwise OR all subscribers agree to let you revoke Post-incorporation subscriptions: are revocable up UNTIL the corp accepts the subscription offer (when the BOD accepts the offer)
Can a corporation decide to sell only to some subscribers and NOT others?
NO! It must be uniform w/in each class or series of stock
What happens if a purchaser/subscriber defaults on pmt?
IF… 1) He pays LESS than 1/2 and fails to pay the rest w/in 30 DAYS of demand, the corp can KEEP the money AND 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, the corp must TRY to sell the stk to someone else for cash (or binding obligation to pay cash) If no one buys, the corp can KEEP the money AND cancel the shares into treasury stk 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) A binding obligation to pay money or property in the future (i.e. a promissory note) 5) A binding obligation to perform FUTURE services having an agreed value
What is unpaid stock?
It’s when stock is issued for NO consideration It is treated as “watered stock”
What is the minimum issuance price for a series of stock?
The PAR value EXCEPTION: If the 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?
“Watered stock” = stock that is issued for LESS than the par value Consequences: The corporation can sue for the “water” amt The directors ARE liable IF they “knowingly authorized” the issuance. The direct purchaserIS liable (w/o a defese) 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?
The 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 the sale of shs authorized by the orig. cert AND sold w/in 2 YRS of incorporation OR the 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). The BOD can’t declare if the 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
