Stock Issuance_Tnfr_Dist Flashcards
ISSUANCE
What is an issuance?
ISSUANCE = when a corporation sells its OWN stock
NOTE: an issuance is NOT when stock is sold in the SECONDARY mkt
SUBSCRIPTION
What is a subscription?
SUBSCRIPTION = a written, signed offer to buy stk from a corporation
REVOCABILITY OF SUBSCRIPTIONS
When is a subscription revocable?
PRE-INCORPORATION SUBSCRIPTION = IRREVOCABLE by PURCHASERS for 3 MONTHS UNLESS
(i) subscription provides otherwise
OR
(ii) all subscribers agree to let you revoke
(rationale = the company needs to be able to depend on the money being there as it goes through its formation)
POST-INCORPORATION SUBSCRIPTION = REVOCABLE UNTIL the corp accepts the subscription offer
Corporation Acceptance of Subscription Offer = when the BOD accepts the offer
SELECTIVE SELLING TO SUBSCRIBERS (not permited)
Can a corporation decide to sell only to some subscribers and NOT others?
NO!
The company’s sales to subscribers must be uniform w/in each class or series of stock
PAYMENT DEFAULT BY SUBSCRIBER
What happens if a purchaser/subscriber defaults on pmt?
After the corporation accepts the offer IF the subscriber defaults on payment then…
1) IF He pays LESS than 1/2 and fails to pay the rest w/in 30 DAYS of demand:
(i) the corp can KEEP the money AND cancel the shares (ii) The shares become authorized and unissued shares (i.e. they become a part of treasury stk)
(iii) the shares can be repurchased in the future
BUT
2) IF He pays 1/2 or MORE and fails to pay rest w/in 30 DAYS of demand:
(i) the corp MUST TRY to sell the stk to someone else for cash (or binding obligation to pay cash)
(ii) If no one buys, then the corp can KEEP the money AND cancel the shares into treasury stk
Under the >50% paid before default scenario, If new subscriber pays MORE than the remaining balance, the defaulting subscriber recovers the EXCESS (less any expenses to resell)
PERMITTED CONSIDERATION FOR STOCK ISSUANCE
What are the 5 permitted forms of consideration for stock issuance?
1) MONEY
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 upon value
NOTE: Company may issue shares as pmt for services in forming the corporation even though this isn’t technically past performance for the corp since it hadn’t been formed yet
UNPAID STOCK
What is unpaid stock?
Unpaid Stock = when stock is issued for NO consideration (basically, when stock is issued that does not fit unto one of the 5 (arguably very broad) consideration categories)
It is treated as “watered stock”
PAR VALUE
What is the minimum issuance price for a series of stock?
The PAR value = the minimum issuance price for a series of stock
EXCEPTION: If the stock is “No par”, then there is no minimum and the corp can sell the stock for any price
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)
ACQUIRING PROPERTY WITH PAR VALUE STOCK
Can a corporation acquire property by issuing par stock?
A company may acquire property with Par Value stock PROVIDED the property is worth AT LEAST the par value of the stock issued
Note: This is based on a BOD’s good faith determination
Recall: The company is allowed to issue stock to acquire property so this is a permitted consideration for the issuance of the stock
WATERED STOCK
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
A direct purchaserIS liable b/c he is CHARGED WITH NOTICE of the PAR VALUE
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) – BUT 3d party status has NO effect on the liability of the initial direct purchaser and directors
PREEMPTIVE RIGHTS
What are preemptive rights?
PREEMPTIVE RIGHTS = The right of an EXISTING SH to MAINTAIN her % of ownership by buying stock (PRO RATA) whenever there is BOTH:
(i) a NEW ISSUANCE; AND
(ii) The issuance is for MONEY and not for a different type of the other 4 permitted considerations
Exists ONLY IF such rights are listed in the CERTIFICATE– IF the certificate is SILENT then preemptive rights DO NOT EXIST
“New issuance” does NOT include the sale of shs authorized by the orig. cert AND sold w/in 2 YRS of incorporation
Does NOT include 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)
SECONDARY STOCK SALES
Is there a restriction on the amount of consideration req’d for a secondary sale of stock?
NO!
There is NOT a restriction on the amount of consideration req’d for a secondary sale of stock
That concept ONLY matters for NEW stock issuance
STOCK TRANSFER RESTRICTIONS
When are stock transfer restrictions valid?
Stock transfer restrictions are valid WHEN they are “NOT an undue restraint on alienation”
IT is OKAY to require a sale of one’s stock to the corp once a SH dies
IT is NOT ALLOWED to require approval of the corp to sell stk – b/c corp could deny approval which would be an undue restraint on alienation
ANY RESTRICTION on SALES MUST be in CERTIFICATE, BYLAWS or by AGMT
FOR A RESTRICTION TO BE ENFORCED against a subsequent transferee, IT MUST
(i) be conspicuously noted on the stock cert.;OR
(ii) transferee must have had knowledge of the restriction
REMEMBER: IF transfer not restricted, a SH can ALWAYS transfer to another below PAR
STOCK DISTRIBUTIONS
When do SHs have a right to a stock distribution?
STOCK DISTRIBUTION =
(i) dividend;
(ii) pmt for repurchases; OR
(iii) pmt for redemption
When the BOD declares it in its DISCRETION
A COURT 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 CANNOT declare IF the company is INSOLVENT (or the distribution would render the company insolvent)
INSOLVENT = Corporation is unable to pay its debts as they become due in the ordinary course of business
ORDER OF DIVIDEND PAYMENTS
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
