Stock & Recap

1. Common Stock: Residual Claims Against Corp. Asset
   1. Par
      1. Used 2 B sig. b/c if SH not put into corp. amt = 2 par value received, liab.
      2. Now, elim. liab. by lwring par value 2 nominal sum
      3. Low par / no par ok'ed in all jxn
      4. Contrib. by SH
         1. Cash, prop. & past serv's perf'ed 4 stock ok
         2. Maj. not allow prom. of future pay / perf. 4 present issue of stock
         3. RMA ok prom. as consid. of stock but min.
   2. Preemptive Rts
      1. SH rt 2 subscribe / buy in his proportional int. when corp. give new issue
      2. Apply 2 close corp.
      3. Not exist unless specif'ly created by [1] articles of incorp., [2] stt, & [3] equity by ct. (min.)
2. Sr. Sec.
   1. Pref'ed Stock
      1. Fixed div. in rel. 2 common issued @ par today
      2. Bd's discretion 4 decl'ing div.
      3. Equity int.
      4. Articles of incorp. def's pref'ed stock & MAY def.
         1. Cumulative div. so div. may not B lost if skipped
         2. Convertible pref'ed stock @ fixed ratio so pay less in div.
         3. Redeemable / callable stock w/premium 2 call back stock
   2. Bonds
      1. Sr 2 pref'ed stock
      2. Liab. int. so fixed legal oblgn 2 pay in int., not div.
      3. Convertible 2 common stock so pay less in int.
      4. Freq'ly redeemable
3. Recap
   1. Def.
      1. Material change in SH's rts, pref's, / privileges in class of stock
   2. Maj. SH of Affected Class Vote 2 Approve Change
      1. Del §242)a)4 & b says maj. votes 4 affected class can amend articles 2 cancel / affect rts of any class 2 receive div. but not decl'ed
   3. Preventing Unfairness 2 Pref'ed SH
      1. Exit option
      2. High stand. 4 vote / unanimity
      3. SH agmt
      4. Could have put by compelling corp. 2 buy back stock @ par + all accrued unpaid div.

Getting $ From Corp. As SH Capacity

1. Divid.
   1. Def.
      1. Dist. of corp. profit 2 SH quarterly / annually (close corp) @ bd's discretion
      2. Pro rata w/in class
      3. Lawful 2 make div. as long as axn not unduly prejud. creditors
   2. Six Tests: Always A Test + INSOLVENCY (MUST COME 2ND)
      1. Insolvency
         1. Can't pay divid. if render corp. insolvent
         2. Balance near / short term debts & liq. asset 2 det. solvency
      2. Balance Sheet
         1. Can pay divid. if Asset - (Liab. + Stated Cap.)
         2. Stated cap. is collective par value
         3. Any surplus other than stated cap is divid. payment
            1. Revalution surplus: surplus after reeval. fixed asset
            2. Paid in surplus: issue common stock @ lwr par value
            3. Reduction surplus: amend articles 2 change par value after issued @ par
      3. Nimble Divid. Test (DL)
         1. Can pay divid. 2 extent have current earnings / profit
         2. Profit det'ed by income stmt where net inc. = gross inc. - expense
         3. Current 4 short X
      4. Earned Surplus Test: Maj. Jxn
         1. Can pay divid. 2 extent have funds in earned surplus / retained earning
         2. Earned surplus is portion of cap. surplus = 2 balance of net undist'ed profits, income, gains, & losses from incorp.
      5. CA Modern Test
         1. Retained earning / earned surplus test OR
         2. Alt. ratio test (new) which is conjunctive
            1. Divid. 2 extent total asset - (total liab. X 125%) +
            2. Divid. 2 extent current asset exceed current liab.
         3. More senstive 2 creditors by giving cushion but can choose test that yields higher #
      6. Revised Model Act Test: 6.40 (Min. Jxn)
         1. Can pay divid. if Asset - Liab.
         2. Any rsbl acct'ing method / fair valuation method
   3. Liab. 4 Improper Divid. Payment
      1. Dir'ors: liab. 4 voting 4 illegal divid. but good faith reliance on fin. stmt
         1. Liab. 4 improper divid. payment amt (Maj)
         2. Liab. 4 damage from improper divid. (Min.)
      2. SH: Not liab. 2 return amt unless knew / had rsn 2 know was improper
   4. Compelling Divid Pay By Ct: Rare
      1. In pub. corp, busi. jgmt & exit so not compel
      2. In close still reluctant 2 possible
2. Stock Repurchase
   1. Dif. From Divid.
      1. Cap. gain not ord. inc.
      2. May / not B pro rata
   2. Same Tests as Divid. B/C Same Prob. 4 Creditors
      1. Installment plan so issue of when 2 apply tests
      2. Insolvency when each payment made but earned surplus in beginning as if entire payment paid in beginning (Neimark v. Mel Kramer)

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12/7/1996

Ms. Haeji Hong

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