#11694 - Financing The Corporation - Business Association (Duke Cox)

Common stock

1. Common stock has no fixed claim on the corporation, and has only residual ownership

Preferred stock

1. Typically carries a dividend that is payable periodically, in the board’s discretion

2. No fixed claim on distributions

3. If the corporation proposes to pay a dividend on common, then it must first pay a designated dividend to the preferred.

Convertibles, classified stock and derivatives

1. Preferred stock and bonds can be made convertible into common stock at the option of the holder.

2. New types of securities can be derived from common stock, in the sense that although the securities are not themselves common stock, their value largely depends on the value of a corporation’s common stock.

Debt

1. Has a fixed claim on the corporation for interest and principal

2. If the corporation liquidates, then before it distributes anything to the common if must satisfy the creditors, and then the preferred stock.

3. Types of debt

   1. Trade debt: amounts that a corporation owes for goods and services

   2. Bank debt

   3. Bonds and debenture: promises, embodied in an instrument, to repay amounts the firm has borrowed on a long term basis, typically by selling the bonds on the general market or on some special market; a promise to pay a specific amount on a specific date

§ 6.01:

1. (a) The articles of incorporation must set forth any classes of shares, series within class, and number within class and series. If more than one class or series, must have separate names and a description of the rights of the class/series. Rights within class/series are identical.

2. (b) The articles must authorize (1) one/more class as having unlimited voting, (2) one/more class as entitled to receive assets upon dissolution.

   1. E.g., common is residual, receives assets; common is voting class.

3. (c) The articles may authorize one/more class that: (1) has special/conditional/limited/no voting rights, (2) is redeemable/convertible as specified, (3) entitles the holders to distributions calculated in any manner, (4) have distribution preference.

   1. E.g., preferred is convertible; preferred has distribution preference.

§ 6.02: (a) If the articles so provide, the board of directors is authorized, without shareholder approval (1) classify unissued shares, (2) reclassify unissued shares of any class, or (3) series.

Timeline for shares:

1. Authorized

   1. Shares in the AoI

2. Issued

   1. Authorized stock that has been issued

   2. Issued but not outstanding: company bought back some of its shares

3. Outstanding

   1. Authorized stock that has been issued

Debt: some is good, just not too much:

1. Tax shield: Under the Internal Revenue Code, interest (from...