University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

276

Pages:

2
Author:

bratrochanter

Key Points Summary 1. Issuance of Shares: o UCC Article 8: Governs issuance of shares, limiting corporations to issue only the number of shares authorized in their articles of incorporation. Directors may be liable if overissuance occurs. o Share Certificates: Certificates serve as evidence of ownership but are not essential under modern laws. Uncertificated shares are often registered directly in the owner’s name. o Share Subscriptions: Prospective shareholders can commit to purchasing shares through a subscription agreement, which can be preincorporation (before the corporation is legally formed) or postincorporation (after formation). Share certificates are issued only after full payment. 2. Transfer of Shares: o Share certificates represent ownership, and transferring them also transfers ownership. Certificates must be endorsed to complete a transfer. o Street Certificates: If a certificate lacks a designated transferee, it can be transferred without endorsement. o Uncertificated Securities: Transfer of these shares occurs via registration changes in the corporate records. o A corporation has a duty to register proper transfers and can be liable if it refuses to do so without justification. 3. Restrictions on Transferability: o In public corporations, free transferability is standard, enabling shareholders to sell shares on the open market. In close corporations, transfer restrictions protect control among shareholders and ensure stability. o Types of Restrictions:  Right of First Refusal: Grants current shareholders or the corporation the chance to match any outside offer a shareholder receives.  Option Agreements: Allow existing shareholders or the corporation the option to buy shares at a predetermined price.  Buy-and-Sell Agreements: Obligate a shareholder to sell their shares to the corporation or other shareholders upon certain events (e.g., death, retirement), ensuring a market for shares in situations where resale might be difficult.  Consent Restraints and Disqualifying Purchasers: Restrict sales to competitors or others not aligned with the corporation’s interests. o Legal Enforceability: Restrictions are valid if they are reasonable and included in corporate governing documents. Buyers must be informed of restrictions via clear notations on share certificates or other written notices. 4. Case Study – Coyle v. Schwartz: o Background: In a buy-sell agreement between two shareholders of a close corporation, they agreed to a valuation of shares but neglected to update this value for 12 years. When the majority shareholder exercised his option to buy the minority’s shares at the outdated price, the minority shareholder argued that the agreement had become a penalty. o Outcome: The court upheld the agreement, stating the minority shareholder had accepted the risks by not updating the valuation or requesting changes over time. Conclusion Corporations use various mechanisms for share issuance and transfer to ensure stability, particularly in close corporations, where share-transfer restrictions maintain control and protect shareholder agreements. Legal cases like Coyle v. Schwartz emphasize the importance of careful drafting and maintenance of shareholder agreements, as courts generally enforce agreed terms unless proven excessively unreasonable or detrimental.