Distributions
Distributions are when the corporation gives money or property to its shareholders and typically takes one of two forms: Dividends or Repurchases. Dividends are when the corporation gives you a certain amount, based on how many shares you have. Approval of the dividends needs to come from the board. Repurchases are when the corporation purchases shares you own. If the corporation repurchases shares from everyone equally, you may have less shares but no less ownership interest. This can change though depending on whether the corporation purchases shares from only a few, instead of everyone. In that instance, you may not receive money, but you increase your ownership interest. Typically, the shareholder cannot be forced to sell their shares (unless there is a call back), but approval of a repurchase needs to come from the board.
Statutory Restrictions
Statutes can restrict corporations from paying out dividends if the purpose of which is to make less money available to its creditors. As such, there are several rules utilized to ensure that the company’s assets do not drop beyond a minimal threshold.
MBCA § 6.40(c): Can’t distribute if you can’t pay debts after distribution (solvency test). Can’t distribute if the distribution causes the liabilities + the liquidation preference of preferred stock is greater than the corporation assets (balance sheet test).
DGCL § 170(a): Can distribute out of it’s surplus or net profits (legal capital and nimble dividend tests). Same applies to repurchases under § 160.
Director Liability
If a director engages in an unlawful distribution under 6.40(c), then they can be personally liable for any distribution made in excess of that rule. However, a director can relieve themselves of liability if they show that the decision was made in good faith by having a full information regarding the distribution. This often means going to an investment bank to purchase a letter that determines whether the corporation is insolvent. If the letter says that the corporation is fine (but it wasn’t) then the letter can be used to show that the directors acted with full knowledge and thus avoid liability.
Sales
Make money by selling more than you purchased the stock for.
State Statutory Rules
States allow stock to be freely traded to anyone at any time. However, a corporation may limit the transferability rights (subject to reasonableness and conspicuous notice). Typically, a corporation will limit the transferability so the offer must first be made to either the corporation, another shareholder, or both before making an offer to a third party.
Federal Securities Law Compliance
Once again, sales of a security such as stock either need to be registered or be exempt. One exemption arises from § 4(a)(1) where you can resell stock as long as you are not an underwriter, issuer, or dealer. If you are one of those, then you must comply with Rule 411. As such, many investors ask corporations to ensure registration so that they do not need to worry about whether the security is registered before making a sale (registration rights).
Secondary Trading Markets
Outstanding shares of public companies can be sold to investors either through exchanges or Over-the-Counter (OTCs).
Exchanges
There are two classic exchanges, the NYSE and the NASDAQ.
The NYSE was originally done in person on a trading floor (which still exists), but now is primarily done over the computers. Essentially, corporations pay big money to be listed on the NYSE, a premium service to sell public corporate stock.
The NASDAQ once was an OTC but became an exchange in 2006. It is comprised of three markets, each with requirements on the initial listing and continued listing. Each market also varies the cost for these listings, proportional to the size of the shares outstanding.
Over-the-Counter
Once again, OTCs used to be conducted by brokers but are now primarily conducted online. The standard OTCs are the OTC Bulletin Board and OTC Markets.
The OTC Bulletin Board uses quotes by a quasi-governtmental agency to sell stock. The only types of stock that can be traded here must periodically be report their security requirements (banks, insurance, etc.).
OTCQX, OTCQB, and Pink Markets all create OTC Market Group, which again has no listing requirements but can only be comprised of corporations with periodic reporting requirements.
Choosing a Secondary Market
Corporations want their stock to be on as active a market as possible (more activity equals more trading). Consequently, most corporations will elect to be listed on the NYSE or the NASDAQ.
Stock Splits
There are two types of stock splits, forward and reverse. A stock split occurs when a corporation wishes to either increase or decrease the stock price on the market (too high and smaller investors can’t afford).
A forward stock split can occur either through providing a dividend (you receive more shares valued at the proportional decrease in price) or through a charter amendment (allowing for more shares authorized to become available).
On the other hand, a reverse stock split combines the shares and thus increases the price (fewer shares equals a higher price). This process must be done through a charter amendment making fewer authorized shares available.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
