Stock and other corporate securities

Question 1

Types

Answer 1

1. Common stock—a basic ownership interest that entitles the owner to vote on corporate governance matters
2. Preferred stock—has preference over other stock with regards to distributions

Question 2

Issuance of stock

Answer 2

1. Authorization—by board of directors (BD) and/or shareholders (SH)
2. Consideration—if adequate, the stock is deemed fully paid and non-assessable
3. Stock subscriptions—a pre-incorporation subscription is irrevocable for six months from the date of subscription (unless all subscribers agree to a revocation)
4. Stock rights, options, and warrants—can also be issued by BD
5. SH’s preemptive rights—the right of a SH to purchase newly issued shares in order to maintain the SH’s proportional ownership share as provided by the articles; a waiver of preemptive rights in writing is irrevocable
6. Securities registration—required for public offerings of stocks; C must file a registration statement with SEC and provide the buyer with a prospectus

Question 3

Distributions

Answer 3

1. BD is authorized to make distributions, usually in the form of cash dividend payments
2. Limitations—C cannot distribute if C is insolvent or if the distribution would make C insolvent
3. D’s liability for unlawful distributions in violation of duties of care/loyalty—D is personally liable to C for the amount in excess of a lawful amount
4. SH suit to compel distribution—SH can sue to enforce his individual right by proving the existence of funds legally available to pay a distribution and D’s bad faith for refusing to pay the distribution

Question 4

Sale of securities

Answer 4

1. Private restrictions on sale
   • Enforceability—the security must be certified, the restriction must be conspicuously noted on the security certificate, and the person must have knowledge of the restriction
   • Challenge to restrictions on transfer of stock—the test is one of reasonableness
2. Federal causes of action
   • Rule 10b-5 action—must meet each of the following requirements:
   o The plaintiff purchased or sold the security
   o Use of interstate commerce
   o The defendant’s fraudulent/deceptive conduct—untrue statements of material fact, failure to prevent misleading statements, or insider trading
   o Materiality—a reasonable investor would find the fact important in deciding whether to purchase or sell a security
   o Scienter—the defendant must make the statement intentionally or recklessly
   o The plaintiff’s justifiable reliance on the defendant’s fraudulent conduct
   o Harm to the plaintiff
   • Rule 16(b) action—elements:
   o Publicly traded Cs—must have securities traded on a national securities exchange or have assets of more than $10 million and more than 500 SHs
   o Corporate insiders—Ds, Os, or SHs with more than 10% of stock
   o Short-swing profits—a corporate insider both bought and sold C’s stock during any six-month period
   o SEC report of change in stock ownership