CORPORATE FINANCE

Question 1

Subscription Agreements

Answer 1

A subscription agreement is a written, signed offer to buy stock from a corporation. A subscription agreement must be in writing and signed by the subscriber to be enforceable.
Pre-Incorporation, a subscription is irrevocable for 6 months, unless provided otherwise.
Post-Incorporation, they are freely revocable until acceptance.

Question 2

Consideration

Answer 2

There is a split of authority regarding appropriate forms of consideration for stock.
i. Traditional Rule: only money, property, or services already performed could qualify as appropriate consideration.
ii. Modern Trend: any tangible or intangible property or benefit is appropriate consideration, including promissory notes and future services.
iii. Non-Monetary Consideration. Board of directors may determine the value of any non-monetary consideration given, and absent fraud or bad faith, their determination is conclusive.

• Par Value: where the certificate of incorporation sets par value for shares (minimum issuance price), shares are not to be issued for anything less. If shares are sold for less than PV, the corp can recover the watered stock from the directors (if they knowingly authorized the issuance) AND the purchaser, but not a BFP of stock from original purchaser. Purchaser has notice of PV by way of AOI. Not applicable to transactions where a SH is selling to third party.
• Treasury Stock. Stock previously issued and has been reacquired by the corporation. Par value does not apply to treasury stock.

Question 3

Stock Transfer Restrictions

Answer 3

Set by AOI, bylaws, or agreement. STR are enforced if the restrictions are reasonable, which means that it is not an undue restraint on alienation.
A valid and reasonable restriction cannot be invoked against a transferee, UNLESS:
(1) it is conspicuously noted on the stock certificate OR (2) the transferee has actual knowledge of the restriction. (ex. Right of first refusal)

Question 4

Preemptive Rights

Answer 4

A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corp by being offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase. This right only applies if the AOI provide the right.

Only new issuance of stock, not treasury stock.
Preemptive rights only exist if the certificate explicitly indicates.

Question 5

Distributions

Answer 5

A shareholder does not have the right to compel a corporation to provide a distribution, whether in the form of a dividend or otherwise. Distribs are declared at the discretion of the board. However, a court will interfere with the board’s discretion and order a distribution upon a showing of bad faith or dishonest purpose. Once a distribution is declared, the shareholder has a right to it.
Directors are jointly and severally liable for an improper distr, but shareholders are only liable if they knew the distribution was improper when they received it.

• Traditional view. Dividends are payable out of earned surplus (generated by business activity= Assets – Liabilities – Stated Capital), capital surplus (generated by issuing stock), but NEVER stated capital (minimum legal capital that corp must have).
• Modern View. Can only NOT make distribution when corp is insolvent, or if it will make corp insolvent.