Finaning the Corporation Flashcards
(33 cards)
Bonds
Long term secured obligations
Registered Bonds - recorded securities on the books of the corporation
Bearer Bonds - not recorded and the holder of the physical coupon will be paid the interest on the security and, on maturity, the entire principal.
Debentures
Long term unsecured obligations of the corporation.
Priority of Debt holders in liquidation or bankruptcy
Secured Debt holders have priority over unsecured debt holders.
Debt security holders generally have no right to participate in the business affairs of the company outside of bankruptcy proceedings.
Equity Securities
Stocks
No right of repayment from the corporation
Last to be repaid upon liquidation.
Types of Shares and Preferences
Common Stock and Preferred
Corporations can issue different classes of stock but there must be at least one class of stock with voting rights.
Common Stock
Carries ownership rights but no fixed obligations.
Holders get paid after all other creditors have been paid in liquidation.
Preferred Stock
Authorized in the certificate of incorporation.
Rights are contractual and found in the certificate usually.
Preferred holders get paid after creditors but before common
May be redeemable
Entitled to the same voting rights as common unless articles of incorporation state otherwise - normally do
Issuance of Shares Generally
Corporations must issue shares of stock representing ownership interests at the first meeting of directors.
Once all shares have been issued the certificate must be amended to authorize more shares. Requires approval of the Bd of Dir and Shareholders my majority vote.
Shareholders have voting rights to elect Bd of Directors
Stock must be authorized and issued by the Bd of Directors.
In the hands of shareholders these are authorized, issued, and outstanding and the only shares that have rights.
Repurchased shares may be cancelled (not resold) or held as treasury stock (and resold)
Par Value
Shares must be designated with a par value or no par.
Par Value is the minimum amount that must be paid for the shares for them to be considered fully paid and non-assessable.
No Par Shares have no minimum amount so long as issued for sufficient consideration. Value determined by the board of directors or shareholders as the certificate of incorporation indicates.
Consideration
Par and no par shares may be issued for sufficient consideration with no requirement that each shareholder pay the same consideration.
Absent full disclosure, it could raise a fiduciary issue.
Forms of Adequate Consideration
- Money
2 Tangible or Intangible property - Obligations to pay the purchase price by subscription agreement
- Obligation to perform service at an agreed upon price
- Prior performance or receipt of labor or services including preformation of the corporation.
When immediate need for capital arises, the Board of Directors May:
Sell Par Value shares below stated amount
Sell No Par Shares below Fair Market Value
Watered Stock
Stock is issued for less than its par value but designated as fully paid.
Good faith judgement of the directors as to the value of property or services received in exchange for shares is rarely subject to successful attack.
Dividends
Distributions of cash or property to shareholders in proportion to ownership.
Relative rights of different classes of stock, including rights to dividends, are set out in the certificate of incorporation.
Preferred stockholders generally paid prior to common stock and may be fixed by contract.
Directors cannot be compelled to pay dividends unless acting in bad faith.
Cumulative and NonCumulative Preferred Designation
Preferred shares designated as cumulative will be paid dividend arrearages in full prior to holders of common stock.
Noncumulative designation, there is no obligation to pay arrearages.
When dividends are not allowed
When distribution would make corporation insolvent or unable to make required payments due to holders of preferred shares.
Dividends may only be paid from surplus which is the difference between NET ASSETS and STATED CAPITAL.
Nimble Dividends are not permitted in NY State
Types of Insolvency
- Equitable Insolvency - corporation unable to satisfy all obligations as they come due
- Balance Sheet Insolvency - Corporation total liabilities exceed assets
Stated Capital
Aggregate amount received by the corporation usually based on par of the shares of stock issued and outstanding
Nimble Dividends
Dividends that are permissible despite the fact that a surplus does not exist at the time distribution is made.
NY Does not permit payment of such dividends.
Rescinding Dividends and Canceling Dividends
Dividends cannot be rescinded once declared unless subsequent payment would impair the ability to operate or would be improper.
Dividends may be cancelled prior to issuance of shares.
Stock Dividends
Dividends paid to shareholders by issuing additional shares.
Requires sufficient surplus to transfer an amount to stated capital representing the shares par value.
Stock Splits
Substantial increase in the number of shares without a requirement of transfer of any amount to the stated capital from surplus.
Reversed Stock Split
Substantial Decrease in the number of shares with no requirement of a transfer of any amount to stated capital from surplus
Stock Repurchases
Treated as Dividends because corporation is distributing cash as if it were a dividend.
Must meet the legal requirements of dividends including sufficient surplus and corporate solvency.
