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The following provisions of the corporate law are enabling provisions related the corporation's stock. In general terms, a corporation may issue shares with a variety of rights and powers. Unless the certificate reserves to the board of directors the right designate stock rights, such rights must be stipulated in the corporation's certificate of incorporation.
Where the certificate has reserved to the board the power to designate rights, when a board issues shares it may designate special rights, including voting power and dividend rights, for the stock it issues. Boards have used this power to create high vote shares and other types of stock with preferences and rights. This power to tailor the rights of stock is central to the board's ability to adopt “poison pills”, also known as shareholder rights plans.
A common right built in a share of stock is the “liquidation preference”. In firms funded by venture capital, venture capitalists will often demand that the shares they are issued come with liquidation preferences. A liquidation preference is a right that grants certain preferential payments to stockholder in the event the corporation undertakes any one of a series of different liquidation events (e.g. a merger, sale of the corporation, or a dissolution). Below is an example of a liquidation preference that might appear in a certificate of incorporation of venture backed start up firm:
This preference ensures that in the event of a liquidation event like a sale of the corporation, the venture investor receives $5 per share of the transaction consideration before any other stockholder is paid. Once the preference is paid, then stockholders share the balance of the transaction proceeds ratably.
When a board issues shares, this chapter of the code also permits boards to restrict the ability of stockholders to buy and sell shares of the corporation – making such shares subject to redemption rights, rights of first offer, and also prohibiting in some circumstances interested stockholder transactions.
With respect to dividends, the provisions in this chapter makes it clear that decisions with respect to the declaration of dividends are ones that lie wholly within the discretion of the board of directors and are not the realm of stockholder action.EDIT PLAYLIST INFORMATION DELETE PLAYLIST
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|1||Show/Hide More||DGCL Sec. 151- Classes and series of stock|
A corporation may issue shares in more than one class, with each class having separate rights and powers. In addition to the liquidation preference, discussed previously, a board can use §151 to issue shares with variable voting rights. For example, Facebook, Google, Twitter and other tech firms have used §151 to issue shares classes of stock to founders with 10 votes per share. Stock issued to the public have 1 vote per share, or in some cases, no votes at all.
Shares issued by the corporation, may also be subject to redemption should that right be stipulated in the certificate of incorporation or the certificate of designation. In a redemption, the board may at any time make a “call” on the stock and can redeem the stock for a price determined in the certificate. A redemption differs from a stock repurchase in the a number of ways. First, a stock repurchase involves a decision by the stockholder to sell their stock. Absent consent of the stockholder, no one can force a stockholder to sell into a stock repurchase. A redemption can lack a certain degree of voluntariness. Stockholders take the stock knowing that the board has the power to redeem stock against the will of stockholders. Second, the stock repurchase can be done at any price. Presumably, the board will want a sufficient number of stockholders to voluntarily tender their shares, consequently the repurchase is typically done a premium to the market price. In a redemption, the redemption price, or at least a formula to calculate the price is set in the certificate of incorporation.
|2||Show/Hide More||DGCL Sec. 157 - Rights and options|
By now, stock options have become well known as a device for employee compensation in corporations. A stock option provides the holder with the right to purchase a share of the corporation at a stated price. When this “strike price” is below the price of the shares trading in the stock market, the options are considered “in the money” and the optionholder has an economic incentive to exercise the stock option. When the strike price is above the market price for the stock, the optionholder does not have an incentive to exercise the options.
Because stock options increase in value with an increase in the stock price, options are thought to be reasonably efficient incentive mechanisms, delivering value to employees when the firm succeeds. Because stock options issued to employees also vest over time, the existence of unvested options as part of an employee's compensation package creates a bonding mechanism between the corporation and the employee.
|3||Show/Hide More||DGCL Sec. 160 - Corporate ownership of its own stock|
Corporations, as entities separate from their stockholders, are empowered by the statute to hold and maintain all sorts of assets, including holding stock of other corporations (making the holding company possible). But can a corporation own its own stock? And, if it does, what are the implications?
The short answer is that a corporation can indeed buy and own its own stock. However, the implications of the corporation buying its own stock are significant. When a corporation buys or redeems its own stock that stock is deemed to be “treasury stock” and is no longer outstanding stock. Treasury stock may not be voted and does not count towards determining a quorum at stockholder meetings.
Any corporation stock held by wholly-owned subsidiary of the corporation is also deemed treasury stock. However, corporation stock held by the corporation in a fiduciary capacity (corporation stock held as part of an employee retirement plan managed by the corporation, for example), is not deemed to be treasury stock.
|4||Show/Hide More||DGCL Sec. 161 - Issuance of stock|
|5||Show/Hide More||DGCL Sec. 170 - Dividends|
When a corporation has profits, it may distribute those profits back to stockholders. These profit distributions back to stockholders are known as “dividends”.
The decision whether or not to issue dividends to stockholders lies wholly within the discretion of the board of directors. Unless the certificate of incorporation states otherwise, stockholders have no right to corporate dividends.
Some old-line corporations, like G.E. are well-known for a long-standing board policy of making dividend payments to their stockholders. Other corporations, like start-up corporations or corporations in high-growth stages of development, have the exact opposite policy. Companies like Alphabet or Facebook have board policies against making dividend payments to stockholders, opting to reinvest all their profits into the company.
|6||Show/Hide More||DGCL Sec. 202 - Restrictions on transfer of stock|
|7||Show/Hide More||Henry v. Phixios Holdings|
In Phixios, the court is asked to rule on the ability of a corporation to place restrictions on stock ownership. In the facts presented in Phixios, it is clear that a corporation has the right, pursuant to Section 202, to place restrictions on who and under what conditions certain people may own shares in the stock of the corporation.
The court's straightforward interpretation of Section 202 makes it clear that when a corporation purports to place restrictions on ownership or transfer of its stock that Section 202 requires actual knowledge by stockholders of such restrictions or at least disclosure of such restrictions on the face of the stock certificate.
|8||Show/Hide More||DGCL Sec. 203 - State anti-takeover legislation|
June 07, 2016
Brian JM Quinn
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