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When does an ISSUANCE of stock occur?
WHEN a CORPORATION sells its own stock
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What is a stock SUBSCRIPTION?
SIGNED WRITTEN OFFER to buy stock from the corporation.
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SUBSCRIPTIONS
When may a stock subscription be REVOKED
1) Pre-incorporation?
2) Post-incorporation?
1) PRE-INCORP. REVOCATION
- CANNOT REVOKE until 3 months AFTER signing subscription offer
- UNLESS (i) subscription provides otherwise, or (ii) ALL subscribers agree to let you revoke
2) POST-INCORP. REVOCATION
May revoke ANYTIME UNTIL ACCEPTED by BOD
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SUBSCRIPTIONS
1) When do the corp. and subscriber become obligated under a subscription?
2) Can the corp. decide to sell only to some subscribers and not others?
1) WHEN THE BOD ACCEPTS THE OFFER to buy
2) NO--offer to sell must be UNIFORM WITHIN EACH CLASS (or series) of stock
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SUBSCRIPTIONS
If the corp. accepts the offer and the subscriber DEFAULTS on payment, what happens if he has paid
1) LESS than 1/2 of purchase price?
2) 1/2 or MORE of purchase price?
1) PAID < 1/2 PURCHASE PRICE
- corp. can KEEP MONEY paid and CANCEL the shares
- subscribe stock treated as AUTHORIZED but UNISSUED
2) PAID ≥ 1/2 PURCHASE PRICE--corp. MUST try to SELL stock to someone else for cash to RECOVER BALANCE DUE
- REMAINING BALANCE UNPAID: Same as situation 1 above (keep money, cancel shares, shares treated as authorized but unissued)
- SOMEONE PAYS MORE THAN BALANCE DUE: Defaulting subscriber recovers (i) ANY EXCESS over what he agreed to pay, MINUS (ii) corp's costs associated with resale.
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CONSIDERATION
2 major issues
- FORM of consideration
- AMOUNT of consideration
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FORM OF CONSIDERATION
5 PERMITTED forms of consideration
1) MONEY (cash or check)
2) PROPERTY (tangible or intangible)
3) SERVICES already performed for the corp.
4) PROMISSORY NOTES to pay money or property in the future
5) BINDING OBLIGATION to render FUTURE SERVICES having an AGREED VALUE
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FORM OF CONSIDERATION
PROHIBITED forms of consideration
1) What are they?
2) What result, if someone tries to "pay" for an issuance with a prohibited form?
1) ANYTHING OTHER THAN THE 5 FORMS PERMITTED
2) "UNPAID STOCK"
- treated as "WATERED STOCK"
- SUBSCRIBER is liable for the amount due
- DIRECTORS are also liable for amount due
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AMOUNT OF CONSIDERATION
1) Par value
2) No par
3) Treasury stock
1) stock may NOT be issued below the MINIMUM ISSUANCE PRICE (though it is permissible for stock to issue at MORE than minimum)
2) stock can issue (i.e., initially sell) for ANY PRICE
3) TREASURY STOCK
- stock PREVIOUSLY ISSUED that as been REACQUIRED by the corp.
- NO MINIMUM PRICE on sale by corp. (treated as "NO PAR" stock)
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AMOUNT OF CONSIDERATION
Acquiring property with PAR VALUE stock
1) Permissible form of consideration?
2) Amount of consideration permissible?
3) Who determines value of consideration for issuance?
1) PROPERTY IS A PERMISSIBLE FORM for issuance of stock
2) VALUE OF PROPERTY ≥ PAR VALUE OF STOCK
3) BOD determination of value is CONCLUSIVE, but ONLY IF made in GOOD FAITH (i.e., NO FRAUD)
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CONSIDERATION
Consequence of issuing PAR VALUE stock for less than par value (i.e., "watered stock") for
1) BOD
2) Putative purchaser of stock
3) TP-purchasers
1) LIABLE for watered-down value (par value minus amount received) IF BOD KNOWINGLY AUTHORIZED the issuance
2) LIABLE (no defenses)
3) NOT LIABLE if TP acting in "good faith," i.e., did not know about the "water"
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CONSIDERATION
PREEMPTIVE RIGHTS***
1) What are they?
2) When is the right triggered?
3) When do they exist?
1) allows an EXISTING S/H to MAINTAIN HER PERCENTAGE OWNERSHIP
2) TRIGGERED BY
- a NEW ISSUANCE of common stock
- for MONEY (includes cash, checks, but nothing else)
3) RIGHTS EXIST ONLY IF CERTIFICATE OF INCORP. says that preemptive rights exist
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CONSIDERATION
PREEMPTIVE RIGHTS
Suppose a certificate of incorporation provides for preemptive rights, and C Corp. issues new stock to G, to acquire Green Acres from G. Do existing S/H have preemptive rights?
NO
- This is NOT an issuance for MONEY (property is being acquired)
- to TRIGGER PREEMPTIVE RIGHTS, the new issuance MUST be for MONEY (cash or checks)
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SUMMARY ISSUANCE OF STOCK
What are the MOST IMPORTANT issues?
1) PREEMPTIVE RIGHTS
2) FORM of consideration
3) TREASURY stock
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