Law Outlines Corporations Outlines
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Financial Structure of the Corporation
Corporate Securities
Equity Securities
(1) Common Stock
Residual interest in profits/assets of corporation after claims by creditors and preferred stockholders have been satisfied
Although common stockholders are last in line with respect to distribution of income and liquidation, they are generally first in line with respect to control
Primary beneficiary of fiduciary duties
Usually have the exclusive power of electing directors
(2) Preferred Stock
Stock is classified as preferred stock when the articles assign to it economic rights senior to those customarily assigned to common stock
If no attribute is assigned to a class of stock with respect to its voting rights, right to dividends, or rights to redemption or in liquidation, courts generally will presume that "stock is stock"
Most Courts have taken the position that the only protections to which holders of preferred stock are entitled to are those spelled out in the articles/certificate
It is all essentially PER CONTRACT
Generally, the liquidation preference is behind other creditors but ahead of common stock
Preferred stock almost always has dividend rights senior to those of common stock
May be voting or non-voting
Cumulative: If a dividend is not paid when due, the right to receive that dividend accumulates and all accrued dividend arrearages must be paid before any dividends can be paid on common stock
Participating: Receive dividends whenever they are paid on common stock
Blank Check Preferred: Rights to dividends, liquidation preferences, redemption rights, voting rights, and conversion rights can be set by the board at the time of issuance
Authorized Stock: Articles/Certificate specifies how many shares of the common/preferred the corporation is authorized to issue
Doctrine of Preemptive Rights
Traditional Rule: A shareholder had an inherent right to maintain his interest in a corporation by purchasing a proportionate share of any new stock issued for cash
Modern Rule: Modern statutes provide corporations with the option of avoiding preemptive rights (almost all corporations do this)
MBCA § 6.30(a): "The shareholders of a corporation do not have a preemptive right to acquire the corporation's unissued shares except to the extent that the articles of incorporation provides otherwise."
The DGCL does not explicitly address preemptive rights BUT DGCL § 157 authorizes a corporation to issue rights to purchase its stock, which can include preemptive rights
Implicitly, this means that there are no preemptive rights by default
Before a corporation who has issued all of its authorized shares can issue more stock, it must amend the articles/certificate to authorize more shares DGCL § 242.
Step 1: "[T]he board of directors shall adopt a resolution setting forth the amendment proposed . . . ." DGCL § 242(b)(1).
But see DGCL § 102(b)(4) (allowing you to set forth a different vote requirement for shareholder approval or for a vote of the board of directors).
Step 2: "The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation . . . ." DGCL § 242(b)(2).
But see DGCL § 102(b)(4) (allowing you to set forth a different vote requirement for shareholder approval or for a vote of the board of directors).
Outstanding Stock: The portion of the authorized stock that has been sold and remains in the hands of the shareholders is the outstanding stock
Authorized But Unissued Stock: Authorized stock but not outstanding stock (a.k.a. Treasury Shares)
Board ordinarily has the authority to decide on what terms to issue the authorized but unissued shares
BUT where the corporation is issuing shares with more than 20% of voting power outstanding immediately before the transaction AND the consideration is other than cash or cash equivalent, shareholder approval is required. See MBCA § 6.21(f).
Corporate statues require that at least one class of equity securities must have voting rights and the right to receive the net assets of the corporation in the event the corporation is dissolved or liquidated
These rights are generally assigned to common stock but can be assigned to preferred stock
Debt Securities
(1) Bonds, (2) Debentures, and (3) Notes
Terms are fixed entirely by contract
Indenture: Complex contract fixing terms of bonds
May include covenants or negative covenants
In the event of default, generally an "acceleration" clause
Notes and Debentures have shorter maturities than bonds
Convertible Debentures: Hybrid securities that closely resemble convertible preferred stock
Redeemable or "callable" at a fixed price
Debt securities generally do not carry voting rights
BUT some corporate statutes allow the issuance of voting debt. See, e.g., DGCL § 221.
UNLESS the articles/certificate provides otherwise, the board of directors have the authority to issue debt securities without shareholder approval
Options
The right to buy or sell something in the future (e.g. stock at a fixed price)
Warrants: Another name for Stock Options
Call option: The right to buy...
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