Stock Issuance, Transfer, and Distribution Flashcards
(18 cards)
What is an issuance?
Issuance occurs when a corporation sells its own stock
NOTE: an issuance is NOT when stock is sold in the SECONDARY market
What is a subscription?
A subscription is a written, signed offer to buy stock from a corporation
When is a subscription revocable?
Pre-incorporation subscriptions: are irrevocable by PURCHASERS for 3 MONTHS unless the subscription provides otherwise OR all subscribers agree to let you revoke
Post-incorporation subscriptions: are revocable up UNTIL the corp accepts the subscription offer (when the Board accepts the offer)
Can a corporation decide to sell only to some subscribers and NOT others?
NO!
It must be uniform within each class or series of stock
What happens if a purchaser/subscriber defaults on payment?
IF…
1) He pays LESS than 1/2 and fails to pay the rest within 30 DAYS of demand, the corporation can KEEP the money AND cancel the shares (they become a part of treasury stock)
2) He pays 1/2 or MORE and fails to pay rest within 30 DAYS of demand, the corporation must TRY to sell the stock to someone else for cash (or binding obligation to pay cash)
** If no one buys, the corporation can KEEP the money AND cancel the shares into treasury stock
** If new subscriber pays MORE than the remaining balance, the defaulting subscriber recovers the EXCESS (less expenses to resell)
What are the permitted forms of consideration for stock issuance?
1) Cash & cash equivalent
2) Tangible or intangible property
3) Services ALREADY performed for the corporation
4) A binding obligation to pay money or property in the future (i.e. a promissory note)
5) A binding obligation to perform FUTURE services having an agreed value
What is unpaid stock?
It’s when stock is issued for NO consideration
It is treated as “watered stock”
What is the minimum issuance price for a series of stock?
The PAR value
EXCEPTION: If the stock is “No par”, then there is no minimum
Price is determined by the board, unless the certificate lets shareholders do it (unlikely)
TREASURY STOCK can be treated as having “no par” ON RESALE (i.e. can sell treasury shares for ANY price)
Can a corporation acquire property by issuing par stock?
Yes; PROVIDED the form is worth at least the par value of the stock issued
Based on a board’s good faith determination
What is “watered stock” AND the consequences for a corporation issuing such stock?
“Watered stock” = stock that is issued for LESS than the par value
Consequences: The corporation can sue for the “water” amount
- The directors ARE liable IF they “knowingly authorized” the issuance
- The direct purchaserIS liable (without a defese)
- A 3d party purchaser from a direct purchaser is NOT liable if she acted in good faith (i.e. BFP that does not know about the water)
What are pre-emptive rights?
The right of an EXISTING SHAREHOLDER to MAINTAIN her % of ownership by buying stock (PRO RATA) whenever there is a NEW ISSUANCE for MONEY (cash/cash equivalent)
- Exists ONLY IF such rights are listed in the CERTIFICATE ** Does NOT include the sale of shares authorized by the original certificate AND sold w/in 2 YRS of incorporation
- Does NOT include the sale of treasury stock UNLESS the certificate says it does
- If new stock is sold for PROPERTY, then there are NO preemptive rights (issuance must be for money)
Is there a restriction on the amount of consideration required for a secondary sale of stock?
NO! That concept ONLY matters for NEW stock issuance
When are stock transfer restrictions valid?
When they are “NOT an undue restraint on alienation”
OK: requiring a sale of one’s stock to the corporation once a shareholder dies
NOT OK: requiring approval of the corp to sell stock
Any restriction MUST be in CERTIFICATE, BYLAWS or by AGREEMENT
To be enforced against transferee, MUST (i) be conspicuously noted on the stock certificate;OR (ii) transferee has knowledge of restriction
When do shareholders have a right to a stock distribution?
When the board declares it in its DISCRETION
Stock distribution =
(i) dividend; (ii) payment for repurchases; OR (iii) payment for redemption
A court will interfere with a board’s discretion ONLY IF there is a showing of bad faith or dishonest purpose (high hurdle to cross)
The board can’t declare if the company is insolvent (or the distribution would render the company insolvent)
In what order are stock dividends paid?
FIRST: Preferred shareholders
“Participating”: means the preferred shareholders get paid 2X: once as preferred shareholders and second as part of common pool
“Cumulative”: means if there are arrears, the past due amounts will be paid in FULL before common get payment (relevant when board doesn’t declare a dividend)
SECOND: Common shareholders
Which funds may be used for distributions to shareholders?
From “surplus” ONLY: APIC + Retained Earnings
Surplus = Assets – liabilities – stated capital (par value of stock)
NEVER from stated capital (par value of stock)
If there is no-par issuance, the board can allocate any part (BUT not all) to surplus within 60 days of issuance
Who can sue to recover from unlawful corporate distrbutions?
Negligent directors and shareholders with knoweldge are PERSONALLY liable for unlawful distributions
The corporation can sue (or shareholders derivatively)
REMEMBER: directors CAN rely on 3rd party experts
Can corporations discriminate among shareholders in repurchases?
Yes EXCEPT, it might have to give equal opportunity to all shareholders in a CLOSE CORPORATION
NOTE: redemption prices are set in the certificate and must be done PROPORTIONALLY within each class of stock
