Deck 33: Ownership of a Corporation

Question 1

Trados Inc. developed software to translate documents into foreign languages. After several years of growth, the company sought to raise venture capital in order to transition to a publicly held company. Several venture capitalists invested in Trados, and in exchange for their investment, they were given shares of preferred stock in Trados. The preferred stock gave the venture capitalists a payment preference in the event the company was liquidated and allowed the preferred stockholders to appoint directors of Trados. The preferred stock also paid a cumulative dividend each year, with any unpaid dividends resulting in an increased liquidation preference. Trados's revenues grew steadily, but the company remained unprofitable. Trados was unable to generate enough returns to pay the common shareholders any dividends. The board of directors approved a merger of Trados with SDL, whereby SDL paid $60 million in cash and stock for Trados. Trados's certificate of incorporation classified such merger as a liquidation and thus the preferred stockholders received the vast majority of the proceeds. Common shareholders received nothing from the sale. Marc Christen, a common shareholder, sued the directors. Christen claimed that the directors had a fiduciary duty to continue operating Trados independently to try to yield returns for the common stock. Did the board breach its fiduciary duty by approving a sale that yielded nothing to common shareholders?

Answer 1

Preferred stock:
Preferred stock holders have an advantage over other stock holders such as common stock holders. The holders of preferred stock are entitled to a fixed dividend and the payment of these stocks takes priority over that of ordinary share dividends.
The advantages are of four types and they are explained as given below:
Preferred as to assets:
In the event of liquidation of assets of a company, the preferred stock holders are to be paid their dues on priority and then other stock holders such as common stock holders will be paid.
Preferred as to dividends:
In the case of payment of dividends, the preferred stock holders are to be paid first and then common stock holders can be paid.
Participating preferred stock holders:
In case of payment of dividends, participating preferred stock holders are paid 7 % extra dividend than those of common stock holders.
Non-Participating preferred stock holders:
Non-participating preferred stock holders receive the maximum dividend above the common stock holders.
The Claim made by a common stock holder named MC is not a valid because the company cannot run without earning profits.
If the firm is not earning profits and still continue to operate, then ultimately it will end up in losses.
The directors did not breach the fiduciary duty by not paying the common stock holders because they have to clear the payments of preferred stock holders in case of liquidation before making the payments to common stock holders.
Therefore, the directors' decision is valid and they did not break the fiduciary duty.

Question 2

If a corporation does not issue certificates of stock, how is ownership of stock shown?

Answer 2

Corporation Record Book:
Ownership of a corporation without the issuance of certificates of stock will be recorded in the corporation's corporate record book.

Question 3

Investment funds managed by Alan Patricof Associates (APA) and Stuart and David Epstein were stockholders of Xpedite Systems Inc. Xpedite wanted to provide an exit strategy for investors, including APA and the Epsteins. Robert Chefitz, a representative from APA, and David Epstein, both board members, were on a committee evaluating strategies. Premiere Technologies Inc. proposed a stock-for-stock merger and acquisition. Although APA and the Epsteins were sophisticated investors, they failed to analyze Premiere or its assets meaningfully. Xpedite's board agreed to the merger and unanimously voted to recommend it. Premiere required APA and the Epsteins to execute agreements granting irrevocable proxies to Premiere to vote their stock in favor of the merger. Two months later, Premiere's registration statement for the merger became effective, and the merger was approved. Three months later, Premiere announced that it would have a shortfall in its revenues. This was not mentioned in the registration statement. The price of Premiere stock dropped 69 percent from the merger price. APA and the Epsteins sued Premier, its officers, and its directors, saying the decline in stock price was the result of material defects in the registration statement in violation of securities law. Should they succeed?

Answer 3

There is restriction on the sale of shares in the situation where the registration statement misstates or excluded relevant details. But in the present case that is already done so the investors have the ability to withdraw the agreement and they can also take legal action against P. In case P does not act in accordance with the legal action it will have to face criminal charges. Along with the registration the prospectus is also needed. According to the Securities Act there is an obligation to register with the SEC when issuing new securities and also to issue a prospectus. It contains all the necessary and relevant information regarding the stock, firm and the one that is contained in the registration statement.

Question 4

What preference might be granted to preferred stockholders?

Question 5

Henry Reget owned 19 of the 1,811 outstanding shares of Astronautics Corp. of America. He filed suit asking the court to order payment of dividends. The company had never paid a dividend. The corporation acquired significant profits, but the board of directors decided that it would be better off reinvesting its profits in research, development, acquisition of other companies and their assets, and profit sharing for its employees. Can Reget compel payment of a dividend?

Question 6

Why do corporations with a small number of stockholders frequently have restrictions on the transfer of its stock?

Question 7

Bank of America (BoA) sold numerous mortgage-backed securities to American International Group Inc. (AIG). After an economic downturn, Bank of America was exposed to significant litigation risk resulting from a high mortgage default rate. In its Annual Report, BoA noted that it "face[d] substantial potential legal liability and significant regulatory action, which could have a material adverse effect on [its] cash flows, financial condition, and results of operations." BoA's Annual Report also noted the difficulty in predicting litigation costs, but gave a detailed explanation of its method of accruing reserves to cover such costs. There was a considerable amount of information in the public domain about AIG's mortgage-backed securities and what portion of that portfolio had been purchased from BoA. Several national newspapers reported that AIG intended to sue BoA and gave detailed figures of AIG's claims. After AIG filed suit against BoA for claims related to the sale of mortgage- backed securities, several institutional stockholders of BoA sued the bank. The stockholders claimed that BoA had misled investors by failing to disclose the imminence and amount of a potential AIG lawsuit. Did BoA mislead investors?

Question 8

What does it mean if stock is 7 percent nonparticipating?

Question 9

Richard Rosso died owning shares of Strata Real Estate Corp. The actual certificates and other documents relating to Strata had been destroyed in a flood, and Richard had thrown all his papers out. His wife, Sandra, said the shares were owned by Richard and her jointly and therefore were not part of his estate. Linda, Richard's daughter from a previous marriage, sued, alleging that the shares had been owned by Richard alone. Under his will, she was entitled to one-sixth of his estate. She argued that even if the shares had been owned jointly and destroyed, Richard's disposal of them destroyed that joint ownership. Did Richard's disposal of the certificates alter the ownership of the stock?

Question 10

Must a purchaser of par-value stock always pay a price in money, property, or services equal to the par value of the stock?

Question 11

How does treasury stock differ from other kinds of stock?

Question 12

Why would management officials of a corporation find stock options to be attractive?

Question 13

In what different forms may dividends be issued to shareholders?

Question 14

Why must insiders of a corporation disclose their trading?

Question 15

Robert Cook was a stockholder in Puritas Metal Products Inc. (PMP). Sale of the stock was restricted so that before a transfer of stock could take place, the stock had to be offered for sale to the corporation and the other shareholders on the same terms. Later, the PMP cancelled Cook's stock and reissued it to his trust, of which he and his wife, Barbara, were trustees. Under the terms of the trust, at Cook's death, the PMP shares were to be retained by the trustees of the trust to be "held" as a Marital Trust. After Cook's death, Barbara alleged that no transfer of PMP stock took place and that she should be allowed to administer the shares and vote them at shareholder meetings. Did Cook's death result in a transfer of the stock so that the corporation and other shareholders should be permitted to purchase it?

Question 16

How may an individual obtain shares of stock in a company?