133
CHAPTER 35
OWNERSHIP OF A CORPORATION
Answers to Learning Objectives
1. The capital stock of a corporation is the declared money value of its outstanding stock.
2. Stock can be common or preferred and preferred as to assets or preferred as to dividends. Stock can
also be par-value or no-par-value stock, treasury stock, or watered stock. A stock right is called a
stock option.
Lesson Outline
1. The capital stock of a corporation is the amount authorized by the articles of incorporation.
2. Ownership in a corporation is evidenced by the title to one or more shares of stock.
6. Treasury stock is stock a corporation has issued and then reacquired.
7. Watered stock is stock that has been issued as fully paid when it has been paid for by services or
property at an inflated value.
8. Stock options give the holder of the option the privilege of buying a given number of shares of
stock at a fixed price at some future date. If the stock’s selling price rises above the option price, the
holder can exercise the option and sell for a profit. If the price goes down, the holder merely
refrains from exercising the option.
9. Dividends are the profits that have been made available for distribution to the stockholders.
Chapter 35 Ownership of a Corporation
134
14. The Federal Securities Exchange Act, 1934, regulates the sale of securities in the security ex-change
and over-the-counter markets.
15. The Securities Investor Protection Act of 1970 is designed to aid certain customers of securities
brokers and dealers who experience financial difficulty.
Comments on Cases
(p. 416) While a stock certificate is prima facie evidence of ownership in a corporation, the actual
ownership must be determined from the facts of the case. No transfer of ownership occurs until
the certificate is delivered to the new owner. In re Interdiction of Vicknair, 822 So.2d 46 (La.
Ct. App.)
(p. 422) The court pointed out that Calvo had acted for Diversified and therefore he was a necessary
participant and a substantial factor in the sale of the unregistered SOE stock. SEC v. Calvo, 378
F.3d 1211 (11th Cir.)
Answers to Questions
(Page 423)
1. The amount of capital stock authorized for a corporation may be altered with the consent of the state
and a majority of the stockholders.
5. If stock is 7% nonparticipating it means that 7% is the maximum to which the preferred
stockholders would be entitled no matter how much the corporation earned.
6. A purchaser of par-value stock from a shareholder will ordinarily pay a price equal to the market
price which may be more or less than the par value of the stock.
7. It is not always possible to easily determine whether stock has been watered if assets such as
patents, trademarks, blueprints, or other similar assets are used to purchase stock since the value of
such assets might be extremely difficult to determine.
135
of the corporation’s securities within a six-month period.
Answers to Case Problems
(Page 424)
1. No. The court held that since the trust was continuing the “hold” the shares, the share-transfer
restriction did not app. There was not a change in ownership because of the death of the trust’s
beneficiary. Puritas Metal Products, Inc. v. Cook, 2012 WL 1660832 (Ohio Ct. App.)
4. No. Until the profits of a corporation are declared as a dividend, the shareholders have no right to
them and the profits belong solely to the corporation. Since the board of directors had valid reasons
not to declare a dividend the court would not intervene. Reget v. Paige, 626 N.W.2d 302 (Wis. Ct.
App.)
5. Yes. The court said that given evidence that: EMR obtained 14.8 percent of MMI and disclosed
that it might attempt to get control of it, within days of that EMR made a cheap, unsecured loan of
$10 million to Jennings, Jennings was MMI’s former chairman and CEO, and Jennings used the
EMR loan to acquire 8.3 percent of MMI’s stock, it was rational to infer that EMR and Jennings
acted together to buy shares in MMI. In that case his profits were subject to the short-swing profits
rule. Roth v. Jennings, 489 F.3d 499 (2nd Cir.)