Stocks and dividends

Question 1

What is stock?

Answer 1

An ownership interest in a corporation!

Question 2

What is the difference between being a stockholder and a debtholder?

Answer 2

A stockholder is forever and is entitled to whatever is left over after the corporation has paid off all its liabilities.

A debtholder only sticks around until they are repaid and they get paid first.

Question 3

How do you prove that you own stock?

Answer 3

Traditionally with a stock certificate.

Question 4

Can there be restrictions on transfer of stock?

Answer 4

Yes, but it will only be enforceable if EITHER

• the restriction is noted on the stock certificate itself OR
• the purchaser of the stocks is actually aware of the restriction.

Question 5

What are the two common types of stock?

Answer 5

Common stock and preferred stock.

Question 6

What is preferred stock?

Answer 6

A class of stock that has preference over common stock in two respects

1. Dividends must be paid to preferred stock first (in a specified amount) AND
2. Preferred stock has priority in a liquidation.

Question 7

How much stock can a corporation issue?

Answer 7

As much as it wants, so long as the amount is set out in the articles of incorporation OR the directors propose an amendment to the articles to increase the number.

Question 8

What is it called when stock exists but has not been sold?

Answer 8

Authorized but unissued.

Question 9

What is it called when stock exists and has been sold?

Answer 9

Authorized, issued, and outstanding (in the marketplace)

Question 10

How can the class or restrictions on stock be decided?

Answer 10

The directors can determine this if the articles of incorporation so authorize.

Question 11

What is acceptable consideration for stock?

Answer 11

Pretty much anything, including cash, property, and past and future services.

Question 12

What is par value?

Answer 12

It is the minimum price for which stock can be sold.

Question 13

When does par value come into play?

Answer 13

Only when the stock is first sold by the corporation.

Question 14

When does par value exist?

Answer 14

Only if the par value is specified in the articles of incorporation.

Question 15

Who is liable for the failure to receive the full par value?

Answer 15

Both the buyer of the stock AND any directors who acted knowingly.

Question 16

What if the corporation issues stock for property that they think satisfies the par value, but actually does not?

Answer 16

Then the stock is known as watered stock, but it still satisfies the par value rule.

Question 17

If you agree to buy stock, can you back out?

Answer 17

If the corporation has not yet been incorporated, then no.

If the corporation has been incorporated, then yes IF the board has not yet formally accepted your agreement to buy the stock.

Question 18

What are preemptive rights?

Answer 18

The right to buy enough stock to maintain your ownership percentage in the corporation if the corporation sells more stock.

Question 19

When are preemptive rights available?

Answer 19

• If the articles of incorporation so dictate OR
• If you are a shareholder of a statutory close corporation.

Question 20

What is a distribution?

Answer 20

A payout to the shareholder.

Question 21

How can a distribution be made?

Answer 21

• Through a divident (a cash payment) OR
• By buying stock from shareholders.

Question 22

When can a director make a distribution?

Answer 22

Pretty much whenever they want, unless limited by the bylaws.

Question 23

When are dividends not allowed?

Answer 23

If the company is insolvent, either in an equity sense or in a balance sheet sense.

Question 24

What does equitable insolvency mean?

Answer 24

A corporation can’t pay its debts as they become due.

Question 25

What does the balance sheet test for insolvency mean?

Answer 25

A corporation can’t make a distribution if the total of its liabilities AND its liquidation preferences are greater than the corporation’s assets.

Question 26

What happens when a distribution is made despite the corporation’s insolvency?

Answer 26

The director might be personally liable if she violated her duty of care or duty of loyalty in approving the dividend.

Question 27

What is recoupment?

Answer 27

The idea that a director is entitled to contribution for an improper distribution from

• other directors who have also violated their duties AND
• the excess amount received by a shareholder who knowingly accepted an unlawful distribution.