Download CHAPTER 34 CHAPTER SUMMARY Debt Securities Authority to

CHAPTER 34
CHAPTER SUMMARY
Debt Securities
Authority to Issue Debt Securities
Definitions

Debt Security source of capital creating no ownership interest and involving the
corporation’s promise to repay funds lent to it

Bond a debt security
Rule each corporation has the power to issue debt securities as determined by the board
of directors
Types of Debt Securities
Unsecured Bonds called debentures, have only the obligation of the corporation
behind them
Secured Bonds are claims against a corporation’s general assets and a lien on specific
property
Income Bonds condition to some extent the payment of interest on corporate earnings
Participating Bonds call for a stated percentage of return regardless of earnings, with
additional payments dependent upon earnings
Convertible Bonds may be exchanged for other securities
Callable Bond bonds subject to redemption
Equity Securities
Issuance of Shares
Definitions

Equity Security source of capital creating an ownership interest in the
corporation

Share a proportionate ownership interest in a corporation

Treasury Stock shares reacquired by a corporation
Authority to Issue Shares only those shares authorized in the articles of incorporation
may be issued
Preemptive Rights right to purchase a pro rata share of new stock offerings
Amount of Consideration for Shares shares are deemed fully paid and nonassessable
when a corporation receives the consideration for which the board of directors
authorized the issuance of the shares, which in the case of par value stock must be at
least par
Payment for Newly Issued Shares may be cash, property, and services actually
rendered, as determined by the board of directors; under the Revised Act, promises to
contribute cash, property, or services are also permitted
Classes of Shares
Common Stock stock not having any special contract rights
Preferred Stock stock having contractual rights superior to those of common stock

Dividend Preferences must receive full dividends before any dividend may be
paid on common stock

Liquidation Preferences priority over common stock in corporate assets upon
liquidation
Stock Options contractual right to purchase stock from a corporation
Dividends and Other Distributions
Types of Dividends and Other Distributions
Distributions transfers of property by a corporation to any of its shareholders in
respect of its shares; become debts of the corporation if and when declared by the board
Cash Dividends the most common type of distribution
Property Dividends distribution in form of property
Stock Dividends a proportional distribution of additional shares of stock
Stock Splits each of the outstanding shares is broken into a larger number of shares
Liquidating Dividends a distribution of capital assets to shareholders
Redemption of Shares a corporation’s exercise of the right to repurchase its own
shares
Acquisition of Shares a corporation’s repurchase of its own shares
Legal Restrictions on Dividends and Other Distributions
Legal Restrictions on Cash Dividends dividends may be paid only if the cash flow
and applicable balance sheet tests are satisfied

Cash Flow Test a corporation must not be or become insolvent (unable to pay
its debts as they become due in the usual course of business)

Balance Sheet Test varies among the states and includes the earned surplus test
(available in all states), the surplus test, and the net assets test (used by the
Model and Revised Acts)
Legal Restrictions on Liquidating Distributions states usually permit distribution in
partial liquidation from capital surplus unless the company is insolvent
Legal Restrictions on Redemptions of Shares in most states, a corporation may not
redeem shares when insolvent or when such redemption would render it insolvent
Legal Restrictions on Acquisition of Shares restrictions similar to those on cash
dividends usually apply
Declaration and Payment of Distributions
Shareholders’ Right to Compel a Dividend the declaration of dividends is within the
discretion of the board of directors and only rarely will a court substitute its business
judgment for that of the board
Effect of Declaration once properly declared, a cash dividend is considered a debt the
corporation owes to the shareholders
Liability for Improper Dividends and Distributions
Directors the directors who assent to an improper dividend are liable for the unlawful
amount of the dividend
Shareholder a shareholder must return illegal dividends if he knew of the illegality, if
the dividend resulted from his fraud, or if the corporation is insolvent