BLRB35 - Business Law and the Regulation of Business...

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Unformatted text preview: Business Law and the Regulation of Business Regulation Chapter 35: Financial Structure of Corporations Chapter By Richard A. Mann & Barry S. Roberts Topics Covered in this Chapter Topics I. Debt Securities A. Authority to Issue Debt Securities B. Types of Debt Securities A. Issuance of Shares B. Classes of Shares A. Types of Dividends and Other Distributions B. Legal Restrictions on Dividends & Other B. Distributions C. Declaration and Payment of Distributions D. Liability for Improper Dividends & D. Distributions II. Equity Securities III. Dividends and Other Distributions Authority to Issue Debt Securities Authority Debt Security – source of capital creating no ownership interest and involving the corporation's promise to repay funds lent to it. repay s Bond – a debt security. debt s Rule – each corporation has the power to issue debt securities as determined by the board of directors. by s Types of Debt Securities s Unsecured Unsecured debentures; have only the obligation of the corporation behind them. the s Secured Bonds – are claims against Secured a corporation's general assets and also liens on specific property. liens s Income Bonds – condition to some Income extent the payment of interest on corporate earnings. corporate Bonds – called Types of Debt Securities s Participating Participating Bonds – call for a stated percentage of return regardless of earnings, with additional payments dependent upon earnings. dependent s Convertible Convertible s Callable Callable Bonds – may be exchanged for other securities. exchanged Bonds – bonds subject to redemption. redemption. Issuance of Shares s Equity Security – source of capital Equity creating an ownership interest in the corporation. corporation. s s s Share – a proportionate ownership interest Share in a corporation. in Treasury Stock – shares reacquired by a corporation. corporation. Authority to Issue – only those shares Authority authorized in the articles of incorporation may be issued. be Debt and Equity Securities Debt Debt Ownership Interest Obligation to Repay Principal Fixed Maturity Obligation to Pay Income Preference on Income Preference on Liquidation Voting Rights Redeemable Convertible No Yes Yes Yes Yes Yes Yes Yes Common Yes No No No No No In some states In some states Preferred Yes No No No Yes Yes Yes, unless denied Yes Yes Some states Yes, unless denied Issuance of Shares s s s Preemptive Rights – right to purchase a pro rata share of new stock offerings. rata Amount of Consideration for Shares – shares are deemed fully paid when a corporation receives the price set by the board of directors. board Payment for Newly Issued Shares – may Payment be cash, property, and services actually rendered; under the Revised Act, promises to contribute cash, property, or services are also permitted. permitted. Issuance of Shares Issuance VOID Authorized But Not Issued Treasury Issued Outstanding Au t ho riz ed Valid Capital Contributions Valid Kind Cash Property Services rendered Promise to contribute cash Promise to contribute property Promise to perform services ULPA Yes Yes No No No No RULPA Yes Yes Yes Yes Yes Yes MBCA Yes Yes Yes No No No RMBCA Yes Yes Yes Yes Yes Yes Classes of Shares s – special contract rights. special s Preferred Stock – stock having contractual rights superior to those of common stock. common – Dividend Preferences – must receive full Common Stock – stock not having any Common dividends before any dividend may be paid on common stock. common – Liquidation Preferences – priority over common stock in corporate assets upon liquidation. liquidation. – Stock Options – contractual right to purchase stock from a corporation. stock Types of Dividends and Other Distributions Distributions s Distributions – transfers of property Distributions by a corporation to any of its shareholders with respect to its shares. shareholders s Cash Dividends – the most common type of distribution. type s Property Dividends – distribution in form of property. form s Stock Dividends – a ratable distribution of additional shares of stock. distribution Types of Dividends and Other Distributions Distributions s shares is broken into a greater number of shares. shares. s Liquidating Dividends – a distribution of capital assets to shareholders. capital s Redemption of Shares – a corporation's of exercise of the right to purchase its own shares. shares. s Acquisition of Shares – a corporation's of repurchase of its own shares. repurchase Stock Splits – each of the outstanding Legal Restrictions Legal s Legal Restrictions on Cash Legal Dividends – dividends may be paid only if the following tests are satisfied: the – Cash Flow Test – a corporation must not be or Cash become insolvent (unable to pay its debts as they become due in the usual course of business). become – Balance Sheet Testvaries among the States B varies and includes the earned surplus test (available in all States), the surplus test, and the net assets test (used by the Model and Revised Acts). (used Other Legal Restrictions s s s Legal Restrictions on Liquidating Legal Distributions – States usually permit distribution in partial liquidation from capital surplus unless the company is insolvent. surplus Legal Restrictions on Redemptions of Legal Shares – in most States, a corporation may not redeem shares when insolvent or when such redemption would render it insolvent. such Legal Restrictions on Acquisition of Legal Shares – restrictions similar to those on cash dividends usually apply. dividends Key Concepts in Legal Restrictions upon Distributions upon Earned Surplus (retained earnings*) Capital Surplus (contributed capital in excess of par or stated value*) Stated Capital (contributed capital*) (Liquidation Preferences) Liabilities *Accounting terminology Surplus Total Assets Net Assets Declaration and Payment of Distributions Distributions Shareholders' Right to Compel a Shareholders' Distribution – the declaration of distributions is within the discretion of the board of directors, and only rarely will a court substitute its business judgment for that of the board's. judgment s Effect of Declaration – once properly Effect declared, a distribution is considered a debt the corporation owes to the shareholders. shareholders. s Liability for Improper Dividends and Distributions Dividends Directors – the directors who assent to Directors an improper dividend are liable for the unlawful amount of the dividend. unlawful s Shareholders – a shareholder must Shareholders return illegal dividends if he knew of the illegality, if the dividend resulted from his fraud, or if the corporation is insolvent. insolvent. s Liability for Improper Distributions Liability Corporation Solvent Nonbreaching Director Breaching Director Knowing Shareholder Innocent Shareholder No Yes Yes No Corporation Insolvent No Yes Yes Yes ...
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This note was uploaded on 10/25/2009 for the course LAW 100 taught by Professor Liu during the Spring '09 term at Zhejiang University.

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