2: ISSUANCE OF STOCK

Question 1

I. what is an issuance

Louise sells 3,000 shares of XYZ Corp. stock. Do the “issuance” rules here in Fact Pattern 2 apply?

Answer 1

corporation sells its own stock, a way to raise capital

no– ISSUANCE OF STOCK apply only when there is an issuance. That means they apply only when __the corporation__ is selling its own stock.

Question 2

II. SUBSCRIPTIONS

***A. Revocation of pre-incorporation subscriptions?

B. Are post-incorporation subscriptions revocable?
What does that mean? At what point are the corporation and the subscriber obligated under a subscription agreement?

C. At what point does a subscriber whose subscription is accepted become a shareholder?

Answer 2

[written, signed offers to buy stock from corporation]

A. no, irrevokable for 6 months
Unless it says otherwise or all subscribers agree to let you revoke.

B. revokable until accepted by the corp
when the board accept the offer and when the compnay notify the subscriber in writing

C. when she pays for the stock

Question 3

III. CONSIDERATION—What must the corporation receive when it issues stock?

A. Form of Consideration.

B. Amount of Consideration.

***3. Treasury stock.
5. Consequences of issuing par stock for less than par value
Who should be liable?

Answer 3

A. Form of Consideration.

1. Permitted: any tangible or intangible benefit to the corporation. That includes money (cash or equivalent), discharge of debt, property, services already rendered for the corporation, even notes and contracts for future services.
2. Prohibited: anything else. If used, it’s “unpaid stock” (treated as water). hard to imagine

B. Amount of Consideration.
1. Par means minimum issuance price. (Par stock is not required; if we have it, it is set in the certificate.)

2. No par means there is no minimum issuance price. Board can set any price.

***3. Treasury stock. This is stock that was previously issued and has been reacquired by the corporation. What is its status? it is authorized (corp can resell it) and issued but not outstanding
treat treasury has no par

4. When there is an issuance for property or services, the board puts a valuation on the consideration received. this valuation is conclusive absent fraud
5. Consequences of issuing par stock for less than par value; i.e., watered stock
   a. Directors, if they knowingly authorized the issuance
   b. buyer (There is no defense – he’s charged with notice of par value)
   c. What if buyer transfers the stock to Third Party? Third Party is not liable if: she didnt know about the water

Question 4

IV. PRE-EMPTIVE RIGHTS
A. A pre-emptive right is?
Does “new issuance” include the issuance of treasury stock?

B. Suppose the certificate of formation is silent as to whether there are preemptive rights. Are there preemptive rights?
C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?

Answer 4

A. A pre-emptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY (cash or its equivalent, e.g., check).
yes

B. no; no, need to be for money
(There are also no pre-emptive rights if the issuance is within six months of formation of the corporation (unless certificate says otherwise)).