Stock & other Corp Securities

Question 1

Common Stock

Answer 1

Basic ownership interest
entitles the owner to vote on corporate governance matters

Question 2

Preferred Stock

Answer 2

Has preference over other stock with regard to distributions

Question 3

Stock Subscriptions

Answer 3

A pre-incorporation subscription is irrevocable for 6 months from date of subscription

Question 4

SH’s preemptive rights

Answer 4

• The right of a SH to purchase newly issued shares in order to maintain their proportional ownership share
• A waiver of preemptive rights in writing is irrevocable!

Question 5

Distributions:
Who can make them?
Limitations?

Answer 5

BoD is authorized to make distributions, usually in the form of cash dividend payments

Limitations: C cannot distribute if C is insolvent or if the distribution would make C insolvent.

Question 6

SH suit to compel distribution

Answer 6

SH can sue to enforce his individual right by proving the existence of funds legally available to pay a distribution AND proving C’s bad faith for refusing to pay the distributions.

Question 7

Private restrictions on sale of stock

Answer 7

• the security must be certified, restriction must be conspicuously noted on the security certificate, and the person must have knowledge of the restriction.
• To challenge this restriction - test is reasonableness

Question 8

Fed CoA:
Rule 10b-5 action
“Insider Trading”

Answer 8

Must meet each of the following reqt’s:
* PL purchased or sold security
* Use of interstate commerce
* D’s fraudulent/deceptive conduct (untrue stmts of material fact, insider trading, etc)
* Materiality: reasonable investor would find the fact important in deciding whether to buy or sell a security
* Scienter: the D must make the statement intentionally or recklessly
* the PL’s justifiable reliance on the D’s fraudulent conduct
* Harm to the PL

Question 9

Fed CoA:
Rule 16(b) action
“Short-swing profit rule

Answer 9

• Publicly Traded C’s - must have securities traded on a nat’l sec exchange OR have assets of more than $10 million and more than 500 SHs
• Corporate Insiders: (Ds, Os, or SHs w/ more than 10% of stock
• Short swing profits: corporate insider both bought and sold C’s stock during any 6 month period
• SEC report of change in stock ownership