Part 10- Corporations, Chapter 42: Organization and Financial Structure of Corporations, Doc 3

Key Points Summary 1. Sources of Corporate Financing: o Corporations may obtain funds from several sources beyond selling securities, including bank loans, short-term financing options (e.g., commercial paper), and asset-based lending like accounts receivable or inventory financing. 2. Equity Securities: o Common Shares: Represent ownership and typically grant shareholders voting rights to elect directors. Common shareholders are last to receive assets upon liquidation but stand to benefit most if the corporation thrives. o Preferred Shares: Hold priority over common shares in terms of asset distribution and dividend payments. Variations include:  Cumulative Dividends: Accumulate unpaid dividends for future payment.  Noncumulative Dividends: Unpaid dividends do not accumulate.  Participating Shares: Allow additional dividends beyond a specified amount. o Preferred shares may also have rights for redemption, conversion to common shares, and limited voting rights, typically only in crucial decisions. 3. Authorized, Issued, and Outstanding Shares: o Authorized Shares: Maximum number of shares allowed by the articles of incorporation. o Issued Shares: Shares sold to shareholders. o Outstanding Shares: Shares currently held by shareholders, which can vote and receive dividends. o Corporations may reacquire shares, with the options to cancel them, return them to unissued status, or hold them as treasury shares (which do not confer voting rights or receive dividends). 4. Options, Warrants, and Rights: o Corporations may issue options and warrants as incentives, allowing holders to purchase shares at a future date at a set price. Rights are typically short-term options for current shareholders to maintain their proportional ownership when new shares are issued. 5. Debt Securities: o Corporations can issue debentures (unsecured, long-term debt) or bonds (secured debt with collateral), often containing contractual rights through indentures. o Notes: Typically short-term and may be secured or unsecured, providing flexibility for corporate borrowing. 6. Consideration for Shares: Modern statutes allow various forms of consideration for shares, including cash, services, promissory notes, and property. The MBCA accepts future services and notes as valid consideration. o Par Value: Acts as a minimum issue price per share but does not reflect fair market value. Shares issued below par value are considered “discount shares.” o The board must ensure shares are issued for fair value, not necessarily par value. Watered Shares arise when shares are overvalued, making the board and shareholders potentially liable for discrepancies. 7. Global Differences in Consideration for Shares: o While many countries have modernized their corporation laws to align with U.S. standards, some countries (e.g., China and Bhutan) maintain more restrictive rules on acceptable share consideration. o