Stocks and Shares 2: Issuance

Okay, so you've read the previous post. Here's the next one. These are the rules to be observed in the issuance or transfer of stocks:

1.) Shares of stock can't be issued in exchange for promissory notes or future services. Rather, the consideration has to be either cash, property, services already rendered or indebtedness already incurred.

2.) Original shares of stock can't be sold for less than par value or issued price (or it would be a watered stock.) Treasury shares, on the other hand can be, as long as the price is reasonable.

3.) Even if the subscription hasn't been fully paid yet, shares of stock can still be issued (but not the certificate.)

4.) Over-issued stocks (in excess of the authorized capital stock) are void, even if the transferee is in good faith.

Certificate of Stock

While a share of stock represents a stockholder's interest in the corporation, a certificate of stock is the evidence of ownership of the shares of stock representing that interest. It can only be issued if the subscription has been fully paid -unless allowed expressly by the articles of incorporation or by-laws. 

If a stockholder has subscribed but hasn't fully paid, he can't transfer part of his subscription unless the corporation agrees. Also, he can't transfer his entire subscription to several transferees -the SEC allows transfer of the whole subscription to one transferee only. This requires the corporation's consent because the new transfer will constitute a novation of the contract.

It is not a negotiable instrument even though it is indorsed and delivered. If it is transferred from a stockholder to a third party, the transfer must be recorded in the corporation's stock and transfer book; the certificate must be surrendered and a new one will be issued in the new owner's favor. If the transfer wasn't recorded, the corporation and the creditors won't be bound by the transfer.

Even though the subscription isn't fully paid, the subscriber enjoys all the rights of a stockholder over the whole subscription.

If the shares of stock in question are no-par shares, they too require full payment for the issuance of a stock certificate.

Subscription Contract

This is a contract for the acquisition of un-issued stock. The stock may be original or a new one, such as when the articles of incorporation are amended to increase the capital stock. It is called a "stock option" if there is a privilege to subscribe for shares of stock within a given period (maximum of 3 years.)

If the contract states that the unpaid subscription will be paid out of the dividends, that stipulation is not valid. It's prejudicial to the creditors' interests.

Remember this also: a subscriber who hasn't fully paid is considered a debtor of the corporation. So if the corporation becomes insolvent, the creditors can sue the stockholder for the unpaid subscription.

Watered Stock

This is a stock that is issued for less than its par or issued value (and is not a treasury stock.) It's not void per se, but the corporation and its creditors can sue the stockholder and the officer in question (if he didn't object to such a transaction) for the difference between the issued/par value and the actual price paid.