Chapter 18 Shareholders Equity Flashcards

when preferred stock carries a redemption privilege the shareholders may

Indeed, the amount to which preferred stockholders are entitled on dissolution is limited to the-face value of their stock. The company can either retire the shares (however, retired shares are not listed as treasury stock on the company’s financial statements) or hold the shares for later resale. Accompanying the decrease in the number of shares outstanding is a reduction in company assets, in particular, cash assets, which are used to buy back shares. The action was approved by the shareholders of the close corporation or the persons empowered to manage the business and affairs of the close corporation under a shareholders’ agreement.

when preferred stock carries a redemption privilege the shareholders may

Preference shares, for instance, will generally have priority over the common shares, and will therefore be paid before the common shareholders. However, preference shares will generally have lower priority than corporate bonds, debentures, or other fixed-income securities. Convertible preferred stock includes an option that allows shareholders to convert their preferred shares into a set number of common shares, generally any time after a pre-established date.


A decrease in the number of directors may not shorten the term of an incumbent director. Failure to comply with this section does not affect the validity of any action taken at a meeting of the shareholders of the corporation. The inclusion or deletion from the certificate of formation of provisions required or permitted to be included in the certificate of formation of a close corporation under Subchapter O. The indebtedness described by Subsection shall be subordinated to the extent required by an agreement binding on the corporation on the date the indebtedness arises or if agreed to by the person to whom the indebtedness is owed or, with respect to indebtedness issued in a distribution, as provided by the corporation. A notice that is mailed is considered to have been sent when the notice is deposited in the United States mail, with postage prepaid, addressed to the shareholder at the shareholder’s address as it appears on the share transfer records of the corporation.

If the agreement alters any provision of the certificate of formation, the certificate of amendment shall identify the altered provision by reference or description. If the agreement is an addition to the certificate of formation, the certificate of amendment must state that fact. A holder of a share of a class without general voting rights but with a preferential right to distributions of profits, income, or assets does not have a preemptive right with respect to shares of any class.

What Are Preference Shares?

Treasury shares are considered to be issued shares and not outstanding shares. The amount of the consideration to be received for shares may be determined in accordance with Subsection by the approval of a minimum amount of consideration or a formula to determine when preferred stock carries a redemption privilege the shareholders may that amount. The formula may include or be made dependent on facts ascertainable outside the formula, if the manner in which those facts operate on the formula is clearly or expressly set forth in the formula or in the authorization approving the formula.

Preferred shares are often used by private corporations to achieve Canadian tax objectives. For instance, the use of preferred shares can allow a business to accomplish an estate freeze. By transferring common shares in exchange for fixed-value preferred shares, business owners can allow future gains in the value of the business to accrue to others . Preferred stocks offer a company an alternative form of financing—for example through pension-led funding; in some cases, a company can defer dividends by going into arrears with little penalty or risk to its credit rating, however, such action could have a negative impact on the company meeting the terms of its financing contract. With traditional debt, payments are required; a missed payment would put the company in default. Their ratings are generally lower than those of bonds, because preferred dividends do not carry the same guarantees as interest payments from bonds, and because preferred-stock holders’ claims are junior to those of all creditors.

Liquidation Preference

Alter or repeal a resolution of the board of directors that states that it may not be amended or repealed by a committee of the board of directors. Directors as alternate members of committees to replace absent or disqualified committee members at a committee meeting, subject to any limitations imposed by the board of directors. Neither the certificate of formation nor the bylaws may provide that less than one-third of the number of directors constitutes a quorum.

  • Paid-in capital (also paid-up capital and contributed capital ) is capital that is contributed to a corporation by investors by purchase of stock from the corporation, the primary market, not by purchase of stock in the open market from other stockholders .
  • An irrevocable proxy shall be specifically enforceable against a person who is not a transferee for value from the time the person acquires actual knowledge of the existence of the irrevocable proxy.
  • Therefore, a single investor who owns 300 shares will have more say in a voting matter than a single shareholder that owns 30.
  • The holders of the percentage of shares specified in the certificate of formation, not to exceed 50 percent of the shares entitled to vote or, if no percentage is specified, at least 10 percent of all of the shares of the corporation entitled to vote at the proposed special meeting.
  • An individual appointed by the court to a panel under this section may not be held liable to the corporation or the corporation’s shareholders for an action taken or omission made by the individual in that capacity, except for an act or omission constituting fraud or wilful misconduct.

What are the rights of preferred shareholders?

Preferred typically have no voting rights, whereas common stockholders do. Preferred stockholders may have the option to convert shares to common shares but not vice versa. Preferred shares may be callable where the company can demand to repurchase them at par value.

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