Slide Set Eight Corporations II Shareholder Rights

Last Time We Spoke About: Corporations - 1. Types of corporations - 2. Pre-incorporation - 3. Formation Corporations - 4. Property of Corporations - 5. Powers of Corporations

Corporations Tonight We Will Speak About: - Corporate Stocks and Bonds - Shareholder Rights in Corporations - Corporate Stocks and Bonds - Acquisition of Shares - Rights of Shareholders - Liability of Shareholders

Corporations 1. Shareholder Rights in Corporations A. The Nature of Stock Part One: What is Stock: The term “stock” derives from what was traditionally deemed to be the capital assets of a business. Traditionally, for merchants, it was deemed to constitute their goods and wares of a kept for sale and traffic (i.e. their inventory). With respect to Business Corporations, the term stock refers to the capital or principal funds of the corporation, formed by the contributions of subscribers from the sale of shares. In the corporate context, the term "stock" has also been held to embrace not only capital stock of a corporation but all corporate wealth and resources, subject to all corporate liabilities and obligations. Accordingly, “shares of stock” refers to a proportionate ownership interest in the corporation.

Corporations 1. Shareholder Rights in Corporations A. The Nature of Stock Continued Part One: What is Stock Continued: Shares of Stock are issued by the corporation pursuant to the terms of the Certificate of Incorporation. Shares of Stock are purchased either by direct subscription from the corporation itself, or from other shareholders, by means of a stock trade. Stock may be Common Stock or Preferred Stock. Ownership of Common Stock entitles the owner to voting rights, whereby such owner of can cast a vote per share to elect members of the Board of Directors. Preferred Stock is an investment vehicle, which entitles the owner to be paid dividends first, but which generally confers no voting rights to the owner. Each share of stock owned represents a fraction interest in the total property of the corporation. Par Value is the value of the stock, Book Value is based on the company’s assets, and Market Value is based on how much the stock is sold for in the open market.

Corporations 1. Shareholder Rights in Corporations A. The Nature of Stock Continued Part Two: Authorized Shares: Section 501 of the Business Corporation Law describes authorized shares. Pursuant to this section, every corporation shall have power to create and issue the number of shares stated in its certificate of incorporation. Such shares may be all of one class or may be divided into two or more classes. Each class of shares shall consist of either shares with par value or shares without having such designation and relative voting, dividend, liquidation and other rights, preferences and limitations, as shall be stated in the certificate of incorporation. The certificate of incorporation may deny, limit or otherwise define the voting rights and may limit or otherwise define the dividend or liquidation rights of shares.

Corporations 1. Shareholder Rights in Corporations Continued A. The Nature of Stock Continued Common Stock - Common stock is ordinary stock that has no preferences but entitles the holder to: (1) participate in the control of the corporation by exercising one vote per share of record, (2) share in the profits in the form of dividends, and (3) participate, upon dissolution, in the distribution of net assets after the satisfaction of all creditors (including bondholders). Common Stock is voting stock

Corporations 1. Shareholder Rights in Corporations Continued A. The Nature of Stock Continued Preferred Stock - Preferred stock has priority over common stock with regard to distribution of dividends and/or assets upon liquidation. - Shares may be acquired by subscription of an original issue or by transfer of existing shares. Preferred Stock is most often not voting stock

Corporations 1. Shareholder Rights in Corporations Continued B. Bonds - Unlike Stock, Bonds are debt securities - A bondholder is a creditor rather than an owner of the corporation. - Bondholders’ interests are represented by an indenture trustee, who is responsible for ensuring that the corporation complies with the terms of the bond. Bondholders are not shareholders and have no voting rights

Corporations 1. Shareholder Rights in Corporations Continued C. The Acquisition of Shares How Shares May Be Acquired Shares May be acquired: From the Corporation by subscription (before or after incorporation), or By means of a transfer of existing shares from an existing shareholder. Subscriptions A Subscription is merely a contract to buy shares from the corporation. A subscription can be done: - Pre-incorporation (offer to corporation); or - Post-incorporation (corporation must accept offer).

Corporations 1. Shareholder Rights in Corporations Continued C. The Acquisition of Shares Statute of Frauds Pursuant to the Statute of Frauds – All Contracts for the Sale and Purchase of Shares of Stock must be in writing and signed by the party to be charged. No writing is required, however, for a contract by which a broker agrees with a customer to buy or sell securities for a customer, as such is merely an agency agreement.

Corporations 1. Shareholder Rights in Corporations Continued D. The Transfer of Shares Publicly Traded Corporations Once legally acquired, the owner of shares of stock of a publicly traded corporation, can freely transfer (sell or gift) their shares to any other natural person (over the age of 21), or corporation (including the corporation from which the shares are issued). Stock trades for corporations traded on exchanges (such as the New York Stock Exchange) are regulated by the Federal Securities and Exchange Commission, while stocks not available on such exchanges are regulated solely pursuant to state law (in New York – The Business Corporation Law and the Martin Act - Article 23-A of the NYS General Business Law). Close Corporations Close Corporations (Corporations which have the sale of their stock limited by their Certificate of Incorporation to certain individuals such as family members or employees) have the trade of their stock restricted by the Certificate of Incorporation. Shares of Stock in such corporations can still often be traded, but are limited to whom the seller can sell to.

Corporations 1. Shareholder Rights in Corporations Continued E. The Rights of Shareholders Ownership Stock Certificate - Must be properly executed by Corporate Secretary. Transfer of Shares - Corporation may restrict transfer when its a close corporation.

Corporations 1. Shareholder Rights in Corporations Continued E. The Rights of Shareholders Voting - Shareholders control the corporation indirectly by electing directors through their voting rights. Cumulative voting (votes based upon shares owned). Voting by proxy (a vote by means of a written sheet). Voting agreement and trusts.

Corporations 1. Shareholder Rights in Corporations Continued E. The Rights of Shareholders Dividends - A dividend is a distribution of a portion of the corporation’s earnings to class of its shareholders - Shareholders also have the right to receive dividends when declared at the discretion of the directors. - In many states, securities statutes provide that no dividend may be declared unless the corporation has an earned surplus - Shareholders may bring a derivative action on behalf of the corporation for damages to the corporation.

Corporations 1. Shareholder Rights in Corporations Continued F. Liability of Shareholders Limited Liability - The concept of limited liability has become one of the essential elements of the modern business corporation. - Accordingly, shareholders are ordinarily protected by law from liability for the acts of the corporation. - Under certain circumstances, shareholders can, however, be held liable for the acts of a corporation beyond their investment in shares of the corporation (this occurs if there is fraud or misconduct, not merely a financial loss).

Corporations 1. Shareholder Rights in Corporations Continued F. Liability of Shareholders Piercing the Corporate Veil - A shareholder can be held liable for the actions of a corporation under the legal doctrine known as “piercing the corporate veil” The factors under which liability applies pursuant to this doctrine include: Failure to maintain adequate corporate records. Commingling of assets. Grossly inadequate capitalization. Diversion by shareholders of corporate funds or assets. Formation of the corporation to avoid existing obligations or commit fraud. Injustice would result if the corporate entity were recognized.

Corporations 1. Shareholder Rights in Corporations Continued F. Liability of Shareholders Other Instances of Liability of Shareholders - A shareholder can further be held liable for the following: Wage Claims. Unpaid Subscriptions. Unauthorized Dividends. Additionally, a Professional Corporation cannot be created to avoid liability for malpractice of a shareholder or employee.

Thank you for Coming For Next Time – Review Chapter 45. We are a hot bench. Questions.