Corporate Law - Burton Law Firm based in Houston, TX

The Burton Law Firm, P.C. has over 20 years of experience in this area of the law. If you have questions about this subject please call us at 713-222-6262; or email Randy Burton at randy@burton-lawfirm.com or David Torok at david@burton-lawfirm.com or Hannah Heinz at hannah@burton-lawfirm.com.

Corporate Law

What is adoption?
A contract principle by which a person agrees to assume a contract previously made for his benefit. An adoption speaks only from the time such person agrees, in contrast to a "ratification" which relates back to the time the original contract was made. In corporation law, the concept is applied when a newly formed corporation accepts a pre-incorporation contract made for its benefit by a promoter.
What is an affiliate?
A corporation that is related to another corporation by shareholdings or other means of control. It includes not only a parent or a subsidiary but also corporations that are under common control.
What is an aggressor?
A corporation that attempts to obtain control of a publicly held corporation, often by a direct cash tender or public exchange offer to shareholders, but also possibly by way of merger, which requires agreement or assent of the target's management.
What is the purpose of anti-dilution provisions?
These appear in convertible securities to guarantee that the conversion privilege is not affected by share reclassifications, share splits, share dividends, or similar transactions that may increase the number of outstanding shares without increasing the corporate capital.
What are articles of incorporation?
The document that is filed in order to form a corporation.
What are authorized shares?
Shares described in the articles of incorporation which a corporation may issue.
What is meant by bear?
Slang term for a speculator who believes securities prices are going to decline.
Who are beneficial holders of securities?
Persons who have the equitable or legal title to shares but who have not registered the shares in their names on the records of the corporation.
What are blue sky laws?
State statutes that regulate the sale of securities to the public. Most blue sky laws require the registration of new issues of securities with a state agency that reviews selling documents for accuracy and completeness. Blue sky laws also often regulate securities brokers and salesmen.
What are bonds?
Long term debt instruments secured by a lien on some or all the corporate property. Typically a bond is payable to bearer and interest coupons representing annual or semi-annual payments of interest are attached. The word bonds are sometimes used more broadly to refer also to unsecured debt instruments.
What are bonus shares?
Par value shares issued without consideration, usually in connection with the issuance of preferred or senior securities, or debt instruments. Bonus shares are considered a species of watered shares and may impose a liability on the recipient equal to the amount of par value.
What is meant by book value?
The "value" of shares determined on the basis of the books of the corporation. Using the corporation's latest balance sheet, the liabilities are subtracted from assets, an appropriate amount is deducted to reflect the interest of the senior securities (preferred shares) and what remains is divided by the number of outstanding shares to obtain the book value of a share.
Who is a broker?
A person who sells or purchases property for the account of another. A broker should be distinguished from a securities dealer who is in the business of buying or selling for his own account. Most securities dealers also act as securities brokers in some transactions, and vice versa. A broker executing a transaction for a customer is entitled to a commission for his services.
What is a bull?
Slang term for a speculator who believes securities prices are going to increase.
What are bylaws?
The formal rules of internal governance adopted by a corporation. Bylaws define the rights and obligations of various officers, persons or groups within the corporate structure and provide rules for routine matters such as calling meetings and the like.
What are calls?
Options to buy securities at a stated price for a stated period. Many calls or call options to purchase shares of companies listed on the New York Stock Exchange are themselves actively publicly traded. The person who commits himself to sell the security upon the request of the call holder is referred to as the call writer and the act of making the purchase of the securities is referred to as the exercise of the option.
What is capital surplus?
An equity or capital account which reflects the capital contributed for shares not allocated to stated capital: the excess of issuance price over the par value of issued shares or the consideration paid for no par shares allocated specifically to capital surplus. Capital surplus may be distributed to shareholders under certain circumstances or used for purchase or redemption of shares more readily than stated capital.
What is meant by capitalization?
Usually it refers to the amounts received by a corporation for the issuance of its shares. However, it may also be used to refer to the proceeds of loans to a corporation made by its shareholders (which may be in lieu of capital contributions) or even to capital raised by the issuance of long term bonds or debentures to third persons. Depending on the context, it may also refer to accumulated earnings not withdrawn from the corporation.
What is cash flow?
The movement of cash through a venture as contrasted with the earnings of the venture.
What kind of transaction is a cash merger?
A transaction in which certain shareholders or interests in a corporation are required to accept cash for their shares while other shareholders receive shares in the continuing enterprise.
What is a cash tender offer?
A technique by which an aggressor corporation seeks to obtain control of a target corporation by making a public purchase offer for a specified fraction (usually a majority) of the target corporation's shares.
Who is a CEO?
The "chief executive officer" of a publicly held corporation. CEO is a preferred and useful designation because official titles of such persons vary widely from corporation to corporation.
What is a certificate of incorporation?
In most states it is the document prepared by the Secretary of State that evidences the acceptance of articles of incorporation and the commencement of the corporate existence. In some states the certificate of incorporation is the name given to the document filed with the Secretary of State, I. e., the articles of incorporation.
What are close corporations or closely held corporations?
Corporations with relatively few shareholders and no regular markets for their shares. There is no litmus test for when a corporation should be considered closely held and the definition may in part depend on the substantive context in which it arises. In addition to the small number of shareholders and lack of public market, close corporations usually have made no public offering of shares and the shares themselves are usually subject to restrictions on transfer. Close and closely held are synonymous in this context.
Who is a common shareholder?
A beneficial holder of common shares; the ultimate owners of the residual interest of a corporation.
What do common shares represent?
The residual ownership interests in the corporation. Holders of common shares select directors to manage the enterprise, are entitled to dividends out of the earnings of the enterprise declared by the directors, and are entitled to a per share distribution of whatever assets remain upon dissolution after satisfying or making provisions for creditors and holders of senior securities.
What is a consolidation?
An amalgation of two corporations pursuant to statutory provision in which both of the corporations disappear and a new corporation is formed.
What are the characteristics of the control of a corporation?
Normally means that a person has power to vote a majority of the outstanding shares. However, control may be reflected in a significantly smaller block if the remaining shares are scattered in small, disorganized holdings.
Who is control person?
In securities law is a person who is deemed to be in a control relationship with the issuer. Sales of securities by control persons are subject to many of the requirements applicable to the sale of securities directly by the issuer.
What is a corporate opportunity?
A fiduciary concept which limits the power of officers, directors and employees to take personal advantage of opportunities that belong to the corporation.
What is cumulative voting?
A method of voting that allows substantial minority shareholders to obtain representation on the board of directors. When voting cumulatively, a shareholder may cast all his available votes in an election in favor of a single candidate.
What does D & 0 insurance refer to?
Directors' and officers' liability insurance. Such insurance, which is widely available commercially, insures such persons against claims based on negligence, failure to disclose, and to a limited extent, other defalcations. Such insurance provides coverage against expenses and to a limited extent fines, judgments and amounts paid in settlement.
What is a deadlock?
In a closely held corporation it arises when a control structure permits either of two or more factions of shareholders to block corporate action if they disagree with some aspect of corporate policy. A deadlock often arises with respect to the election of directors, e. g., by an equal division of shares between two factions, but may also arise at the level of the board of directors itself.
What is a dealer?
A person who trades in securities for his own account.
What are debentures?
Long term unsecured debt instruments. Typically a debenture is payable to bearer and interest coupons representing annual or semiannual payments of interest are attached What is the deep rock doctrine?
A principle in bankruptcy cases by which unfair or inequitable claims presented by controlling shareholders of bankrupt corporations may be subordinated to claims of general or trade creditors.
What is a de facto corporation?
A partially formed corporation that provides a shield against personal liability of shareholders for corporate obligations; such a corporation may be attacked only by the state.
What is a de facto merger?
A transaction which has the economic effect of a statutory merger but is cast in the form of an acquisition of assets or an acquisition of voting stock and is treated by a court as if it were a statutory merger.
What is a de jure corporation?
A corporation that is sufficiently formed to be recognized as a corporation for all purposes. A de jure corporation may exist even though some minor statutory requirements have not been fully complied with.
When does de-registration of an issuer occur?
When the number of securities holders of an issuer registered under Section 12 of the Securities Exchange Act of 1934 has declined to the point where registration is no longer required.
What is a derivative suit?
A suit brought by a shareholder in the name of a corporation to correct a wrong done to the corporation.
Why does dilution of outstanding shares occur?
From the issuance of additional shares. The dilution may be of voting power if shares are not issued proportionately to the holdings of existing shareholders, or it may be financial, if shares are issued disproportionately and the price at which the new shares are issued is less than the market or book value of the outstanding shares prior to the issuance of the new shares.
What does discount mean?
A general term for the issuance of a security at less than the face amount or stated amount of the security. Issuance of a bond or debenture at a discount increases the effective interest rate on such a security if it is held to maturity since the face amount is paid at maturity.
What are discount shares?
Par value shares issued for cash less than par value. Discount shares are considered a species of watered shares and may impose a liability on the recipient equal to the difference between the par value and the cash for which such shares were issued.
What is dissension?
In a closely held corporation refers to personal quarrels or disputes between shareholders that may make business relations unpleasant and interfere with the successful operation of the business. Dissension, however, may occur without causing a deadlock or adversely affecting the corporation's business.
What is a distribution?
A payment to shareholders by a corporation. If out of present or past earnings it is a dividend. The word distribution is often accompanied by a word describing the source or purpose of the payment, e. g., distribution of capital surplus, or liquidating distribution.
What is a dividend?
A payment to shareholders from or out of current or past earnings. The word dividend is sometimes used more broadly to refer to any payment to shareholders though a more appropriate term for payments out of capital is distribution.
What is double taxation?
It refers to the structure of taxation under the Internal Revenue Code of 1954 which subjects income earned by a corporation to an income tax at the corporate level and a second tax at the shareholder level if the same income is distributed to shareholders in the form of dividends.
What is a down stream merger?
The merger of a parent corporation into its subsidiary.
What is equity or an equity interest?
Financial terms that refer in general to the extent of an ownership interest in a venture. In this context, equity refers not to a legal concept but to the financial definition that an owner's equity in a business is equal to the business's assets minus its liabilities.
What is an equity security?
A security that represents an interest in the equity of a business. Equity securities are usually considered to be common and preferred shares.
What is ESOP?
An acronym for employee stock ownership plan. Such plans acquire shares of the employer for the benefit of employees usually through contributions of the employer to the plan. The purpose of such plans is to acquire ownership of shares of the employer corporation for the benefit of employees. This is usually accomplished through contributions of the employee to the plan.
What does an ex dividend refer to?
The date on which a purchaser of publicly traded shares is not entitled to receive a dividend that has been declared and the seller of such shares is entitled to retain the dividend. The ex dividend date is a matter of agreement or of convention to be established by the securities exchange. On the first day shares are traded without the right to receive a dividend, the price will decline by approximately the amount of the dividend; such shares are often referred to as "trading ex dividend."
What is a float?
The supply of securities in street name that comprises the source of most securities delivered by speculators to complete their transactions. The term float may also be used to mean the delay in processing transactions by banks and others which may permit the interest-free use of funds for brief periods.
What is a forced conversion?
A conversion of a convertible security that follows a call for redemption at a time when the value of the conversion security into which it may be converted is greater than the amount that will be received if the holder permits the security to be redeemed. Normally, a holder of a convertible redeemable security has a period of time after the call for redemption to determine whether or not to exercise the conversion privilege.
What does freeze-out refer to?
The process, usually in a closely held corporation, by which minority shareholders are prevented from receiving any direct or indirect financial return from the corporation in an effort to persuade them to liquidate their investment in the corporation on terms favorable to the controlling shareholders.
Are general partners unlimitedly liable for the debts of the partnership?
Yes. The general partner is usually used in contrast with a limited partner in a limited partnership, but general partner is also sometimes used to refer to any partner in a general partnership.
What is meant by going private?
A transaction in which public shareholders of a publicly held corporation are compelled to accept cash for their shares while the business is continued to be owned by officers, directors, or large shareholders. A going private transaction may involve a merger of the publicly held corporation into a subsidiary in a cash merger.
What does going public refer to?
The first public distribution of securities by an issuer pursuant to registration under the securities acts. If a corporation has been in business for several years, the initial registration by which the corporation goes public is apt to be difficult and expensive.
What is meant by gray knight?
Slang term for a bidder in a takeover attempt who, without solicitation from the target, tries to take advantage of the resistance of the target.
What is a holding company?
A corporation that owns a majority of the shares of one or more other corporations. Usually a holding company is not engaged in any business other than the ownership of such majority shares.
Do hybrid securities have some of the attributes of both debt securities and equity securities?
Yes.
Who are incorporators?
A person or persons who execute the articles of incorporation. The role of the incorporator is largely limited to the act of execution of the articles of incorporation, and restrictions on who may serve as incorporators have largely been eliminated.
What is indemnification?
The practice by which corporations pay expenses of officers or directors who are named as defendants in litigation relating to corporate affairs. In some instances corporations may indemnify officers and directors for fines, judgments, or amounts paid in settlement as well as expenses.
What is in pan delicto?
A principle that usually is referred to as the "unclean hands" doctrine. The principle limits a person intending to engage in wrongful conduct from suing another wrongdoer when things do not work out as expected.
Who is an inside director?
A director of a publicly held corporation who holds an executive position with management.
What does the term insider mean?
Refers to persons having some relationship to an issuer, and whose securities trading on the basis of nonpublic information may be a violation of law.
What is insider trading?
A transaction in shares of publicly held corporations by persons with inside or advance information on which the trading is based. Usually the trader himself has an employment or other relation of trust and confidence with the corporation. Such a person is often called an insider; that term is broader than inside director.
What is insolvency?
This can refer to either equity insolvency or insolvency in the bankruptcy sense. Equity insolvency means that the business is unable to pay its debts as they mature while bankruptcy insolvency means that the aggregate liabilities of the business exceeds its assets. Since it is not uncommon for a business to be unable to meet its debts as they mature yet have assets that exceed in value its liabilities, or vice versa, it is often important to specify in which sense the term insolvency is being used.
What are institutional investors?
Large investors, such as mutual funds, pension funds, insurance companies, and others who largely invest other people's money.
Who are interlocking directors?
Persons who serve simultaneously on the boards of directors of two or more corporations that have dealings with each other. Federal antitrust law prohibits interlocking directors of competing businesses; such directors may also create problems involving fiduciary duties.
What is intra vires?
Acts within the powers or stated purposes of a corporation.
Who are investment bankers?
Bankers at commercial organizations involved in the business of handling the distribution of new issues of securities. An investment banker may also provide other investment and advisory services to corporations.
What are investment companies?
Corporations that are engaged in the business of investing in securities of other businesses. The most common kind of investment company is the mutual fund. An investment company differs from a holding company in that the latter seeks control of the ventures in which it invests while an investment company seeks the investment for its own sake and normally diversifies its investments. Investment companies are subdivided into "open end" and "closed end" companies. An "open end" company stands ready at all times to redeem its securities at net asset value arid to issue new shares to investors on demand; such an investment company is usually known as a mutual fund. An investment company that has a fixed capitalization and neither issues new shares or redeems outstanding shares on request is called a "closed e n d company.
What are issued shares?
Shares a corporation has actually issued and has not cancelled. Issued shares should be contrasted with authorized shares. Issued shares that have been reacquired by the corporation are called treasury shares.
What is a joint venture?
A limited purpose partnership largely governed by the rules applicable to partnerships. In an earlier day, many states permitted corporations to participate in joint ventures but treated as ultra vires an attempt by a corporation to become a partner in a general partnership.
What does leverage refer to?
The advantages that may accrue to a business through the use of debt obtained from third persons in lieu of contributed capital. Such debt improves the earnings allocable to contributed capital if the business earns more on each dollar invested than the interest cost of borrowing funds.
What is a limited partnership?
A partnership consisting of one or more limited partners (whose liability for partnership debts is limited to the amount originally invested) and one or more general partners (whose liability for partnership debts is unlimited). To create a limited partnership a certificate must be filed with a State official, and even if a certificate is filed a limited partner may lose the shield of limited liability if he actively participates in the management of the business.
What is a listed security?
A security that is publicly traded on a securities exchange. For a security to be listed the issuing corporation must meet the requirements established by the exchange and, in most exchanges, sign a listing agreement with the exchange.
What is a margin?
The amount a purchaser of a security must deposit with his broker if he wishes to borrow from his broker part of the purchase price on the collateral of the shares. A margin transaction increases the leverage of the transaction.
When does a margin call occur?
When the market price of securities purchased on margin declines so that the investor must increase his deposit with the broker to maintain the minimum required margin.
What is a margin requirement?
The percentage of the purchase price that must be deposited with a broker to purchase a security on margin. The margin requirement is set or adjusted by the Federal Reserve Board.
What is a merger?
An amalgamation of two corporations pursuant to statutory provision in which one of the corporations survives and the other disappears.
What is a mutual fund?
A publicly held open end investment company that usually invests only in readily marketable securities. An "open end" investment company stands ready at all times to redeem its shares at net asset value. A mutual fund thus provides the advantages of complete liquidity, diversification of investment, and skilled investment advice for the small investor.
What is NASDAQ?
An acronym for "National Association of Securities Dealers Automated Quotations" and is the principal recording device for transactions on the over-the-counter market.
What is a negative cash flow?
A situation where the cash needs of a business exceed its cash intake. Short periods of negative cash flow create no problem for most businesses. However, longer periods of negative cash flow may require additional capital investment if the business is to avoid insolvency in the equity sense.
What are nimble dividends?
Dividends paid out of current earnings at a time when there is a deficit in earned surplus (or other financial account from which dividends may be paid). Some state statutes do not permit nimble dividends; these statutes require current earnings to be applied against prior deficits rather than being used to pay a current dividend.
What are nominees?
A form of securities registration widely used by institutional investors to avoid onerous requirements of establishing the right of registration by a fiduciary.
What are nonvoting common shares?
Shares that expressly have no power to vote. Such shares may be created in most states. In some states, however, nonvoting shares may be entitled to vote as a class on certain proposed changes adversely affecting that class as such.
What are no par shares?
Shares which are stated to have no par value. Such shares are issued for the consideration designated by the board of directors; such consideration is allocated to stated capital unless the directors or shareholders determine to allocate a portion to capital surplus. As a result, in many respects no par shares do not differ significantly from par value shares.
What is a novation?
A contract principle by which a third person takes over the rights and duties of a party to a contract, such party thereby being released from obligations under the contract. In the law of corporations, the concept may be applied to the release of a promoter who is personally liable on a pre-incorporation contract when the corporation is formed and adopts the contract. A novation requires the consent of the other party to the contract, but that consent may be implied from the circumstances.
Whatareoddlots?
Units of securities less than the standard trading unit or round lot.
What are organizational expenses?
The costs of organizing a corporation, including filing fees, attorneys' fees, and related expenses. Organizational expenses may also include the cost of raising the initial capital through the distribution of securities.
What are outside directors?
Directors of publicly held corporations who do not hold executive positions with management. Outside directors, however, may include investment bankers, attorneys, or others who provide advice or services to incumbent management and thus have financial ties with management.
What does over-the-counter mean?
To the broad securities market consisting of brokers who purchase or sell securities by telephone rather than through the facilities of a securities exchange. At one time completely unorganized, the over the-counter market is now relatively organized with computerized quotation and transaction reporting services.
What is par value or stated value of shares?
An arbitrary or nominal value assigned to each such share. At one time par value represented the selling or issuance price of shares but in modern corporate practice, par value has little significance and serves only a limited role. Shares issued for less than par value are usually referred to as watered shares.
What is pendent jurisdiction?
A principle applied in federal courts that allows state created causes of action arising out of the same transaction to be joined with a federal cause of action even if diversity of citizenship is not present.
What is a phantom stock plan?
An employee benefit plan in which benefits are determined by reference to the performance of the corporation's common shares.
What is a pooling agreement?
A contractual arrangement among shareholders relating to the voting of their shares. So long as such agreement is limited to voting as shareholders, it is enforceable.
What are porcupine provisions?
Defensive provisions in articles of incorporation or bylaws designed to make unwanted takeover attempts impossible or impractical without the consent of the target's management.
What do preemptive rights allow?
A shareholder to purchase or subscribe for a proportionate part of a new issue of shares in order to protect his interest in the corporation from dilution. In modern statutes, preemptive rights may be limited or denied.
What are preferred shares?
Shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred shares are usually entitled only to receive specified limited amounts as dividends or on liquidation. If preferred shares are entitled to share in excess distributions with common shareholders on some defined basis, they are participating preferred shares. Participating preferred shares may also be called class A common, or some similar designation to reflect its open-ended rights.
What are preferred shareholders?
Beneficial holders of preferred shares.
What is a preferred shareholders' contract?
The provisions of the articles of incorporation, the bylaws, or the resolution of the board of directors, creating and defining the rights of holders of the preferred shares in question. Preferred shareholders have only very limited statutory or common law rights outside of the preferred shareholders' contract. However, even provisions creating and defining the rights of holders of preferred shares may usually be amended without the consent of each individual holder of preferred shares. The major protection provided by statute against onerous amendments is the right of preferred shareholders to vote as a class on such changes.
What is meant by premium?
A general term for the issuance of a security at a price greater than the face amount or stated amount of the security. Issuance of a bond or debenture at a premium reduces the effective interest rate on such a security since only the face amount is paid at maturity.
What is the private placement of securities?
The sale of securities to sophisticated investors without registration under federal or state securities acts under the private offering exemption.
Who are promoters?
Persons who develop or take the initiative in founding or organizing a business venture. Where more than one promoter is involved in a venture, they are usually described as co-promoters.
What is a prospectus?
A document furnished to a prospective purchaser of a security that describes the security being purchased, the issuer, and the investment or risk characteristics of the security. SEC regulations require a prospectus meeting specified requirements to be provided to each prospective purchaser of registered public offerings of securities.
What is a proxy?
The grant of authority by a shareholder to someone else to vote his shares. Depending on the context, proxy may refer to the grant of authority itself, the document granting the authority, or the person granted the power to vote the shares.
What is proxy solicitation machinery?
A phrase commonly used to describe the phenomenon that incumbent management of a publicly held corporation may usually produce large majorities of shareholder votes on any issue it desires. This power is based in part on the ability of incumbent management to use corporate funds to communicate at will with the shareholders and partially on the ability to represent their views as the views of "management."
What is a proxy statement?
The document that must accompany a solicitation of proxies under SEC regulations. The purpose of the proxy statement is to provide shareholders with the appropriate information to permit an intelligent decision.
What is a public exchange offer?
A technique by which an aggressor corporation seeks to obtain control over a target corporation by offering to exchange a packet of its securities for the target corporation's voting shares. Usually, a specified number of target corporation shares must be presented for exchange before it will take place.
What is involved in a public offering?
The sale of securities by an issuer or a person controlling the issuer to members of the public. Generally, any offering that is not exempt under the private offering exemption of the Securities Act of 1933 and/or similar exemptions under state blue sky laws is considered a public offering. Normally registration of a public offering under those statutes is required though in some instances another exemption from registration may be available.
How is publicly held corporation defined?
A corporation with shares held by numerous persons. Shares of publicly held corporations are usually traded either on a securities exchange or over-the-counter.
What are puts?
Options to sell securities at a stated price for a stated period. If the price declines, a holder of a put may purchase the shares at the lower market price and "put" the shares to the put writer at the contract price. Puts on some New York Stock Exchange securities are publicly traded but more securities have call options written than put options.
What is a quo warranto?
A devise designed to test whether a person exercising power is legally entitled to do so. In the law of corporations, quo warranto may be used to test whether a corporation was validly organized or whether it has power to engage in the business in which it is involved.
What happens with recapitalization?
A restructuring of the capital of the corporation through amendment of the articles of incorporation or a merger with a subsidiary or parent corporation. Recapitalization often involve the elimination of unpaid cumulated preferred dividends, but may also involve reduction or elimination of par value, the creation of new classes of senior securities, or similar transitions.
Who is a record owner of shares?
The person in whose name shares are registered on the records of the corporation. A record owner is treated as the owner of the shares by the corporation whether or not he is the beneficial owner of the shares.
What is meant by redemption?
The reacquisition of a security by the issuer pursuant to a provision in the security that specifies the terms on which the reacquisition may take place. A security is called for redemption when the issuer notifies the holder that the redemption privilege has been exercised. Typically, a holder of a security that has been called for redemption will have a limited period thereafter to decide whether or not to exercise a conversion right, if one exists.
Is a registered corporation a publicly held corporation?
Yes.
What does registration of securities under the Securities Act of 1933 allow?
It permits the public sale of such securities in interstate commerce or the use of the mails. That registration should be distinguished from the registration of corporations under the Securities Exchange Act of 1934.
What is a registration statement?
The document that must be filed to permit registration of securities under the Securities Act of 1933. A major con~ponent of the registration statement is the prospectus that is to be supplied prospective purchasers of the securities.
What is reorganization?
A general term describing corporate amalgamations or readjustments. The classification of the Internal Revenue Code is widely used in general corporate literature. A Class A reorganization is a statutory merger or consolidation (I. e., pursuant to the business corporation act of a specific state). A Class B reorganization is a transaction by which one corporation exchanges its voting shares for the voting shares of another corporation. A Class C reorganization is a transaction in which one corporation exchanges its voting shares for the property and assets of another corporation. A Class D reorganization is a "spin off' of assets by one corporation to a new corporation; a Class E reorganization is a recapitalization; a Class F reorganization is a "mere change of identity, form, or place of organization, however effected."
What is a reverse stock split?
A stock split in which shares are aggregated so that there are fewer shares outstanding after the split than before. Reverse stock splits often create fractional shares and may be used as a device to go private.
What is meant by rights?
Short term options to purchase shares from an issuer at a fixed price. Rights are often issued as a substitute for a dividend or as a "sweetener" in connection with the issuance of senior or debt securities. Rights are often publicly traded.
Is a round lot the standard trading unit of securities?
Yes. On most securities exchanges a round lot is 100 shares.
What is scrip?
The representation of fractional shares in connection with a stock dividend. Scrip merely represents the right to receive a portion of a share; scrip is readily transferable so that it is possible to acquire scrip from several sources and assemble the right to obtain the issuance of a full additional share.
What is a Saturday night special?
A surprise tender offer which expires in one week. Designed to capitalize on panic and haste, such an offer may be made Friday afternoon to take advantage of the fact that markets and most offices are closed on Saturday and Sunday. Saturday night specials have been effectively prohibited by regulations under the Williams Act.
What is meant by securities?
It is a general term that covers not only traditional securities such as shares of stock, bonds, and debentures, but also a variety of interests that have the characteristics of securities, i. e., that involve the investment with the return primarily or exclusively dependent on the efforts of a person other than the investor.
What are securities exchanges?
Markets for the purchase and sale of traditional securities at which brokers for purchasers and sellers may effect transactions. The best known and largest securities exchange is the New York Stock Exchange.
What are security-for-expenses statutes for?
To require certain plaintiffs in a derivative suit to post a bond with sureties from which corporate or other defendants may be reimbursed for their expenses if they prevail. Designed as a protection against strike suits, security-for-expenses statutes have been criticized as being illogical and unnecessary.
What is meant by a series of preferred shares?
Sub-classes of preferred shares with differing dividend rates, redemption prices, and rights on dissolution, conversion rights, and the like. The term of a series of preferred shares may be established by the directors so that a corporation periodically engaged in preferred shares financing may readily shape its preferred shares offering to market conditions through the use of series of preferred shares.
What are shareholders or stockholders?
Persons who own shares of stock of the corporation. Such shares may be either common shares or preferred shares.
What is a short form merger?
A merger of a largely or wholly owned subsidiary into a parent through a stream-lined procedure permitted under the statutes of many states.
What is a short sale?
A transaction by a speculator by which he borrows securities in order to sell them. A short seller is gambling that the market price of the security will decline so that he can replace the borrowed security at a lower price than the price at which he sold them. The repurchase of the security is often referred to as "covering" the short sale. A short seller may suffer substantial losses if the price increases, since he will have to cover the short sale at the higher price.
What is short sale against the box?
A short sale where the speculator owns enough shares of the security involved to cover the borrowed securities, if necessary. The "box" referred to is the hypothetical safe deposit box in which the certificates are kept. A short sale against the box is not as risky as a short sate.
What does a sinking fund refer to?
An obligation sometimes imposed pursuant to the issuance of debt securities by which the issuer is required each year to set aside a certain amount to enable the issuer to retire the securities when the mature. A sinking fund may be allowed to a cumulate or may be used each year to redeem a portion of the outstanding debt securities.
What is a smoking gun?
A mistake by an aggressor company that may be used by the target company in a takeover attempt to gain additional time. A smoking gun that is so serious that the entire takeover attempt must be cancelled is called a show stopper.
What are squeeze-outs?
Techniques by which a minority interest in a corporation is eliminated or reduced. Squeeze-outs may occur in a variety of contexts, e. g., in a "going private" transaction in which minority shareholders are compelled to accept cash for their shares, or the issuance of new shares to existing shareholders in which minority shareholders are given the unpleasant choice of having their proportionate interest in the corporation reduced significantly or of investing a large amount of additional or new capital over which they have no control arid receive little or no return. Many squeeze-outs involve the use of cash mergers. Squeeze-out is often used synonymously with freeze-out.
What is a staggered board?
A board of directors in which a fraction of the board is elected each year. In staggered boards members serve two or three years, depending on whether the board is classified into two or three groups.
What is stated capital?
Technically, it consists of the sum of the par values of all issued shares plus the consideration for no par shares to the extent not transferred to capital surplus plus other amounts that may be transferred from other accounts. Distributions generally may not be made from stated capital.
What is a stock dividend?
A proportional distribution of shares without payment of consideration to existing shareholders. A stock dividend is often viewed as a substitute for a cash dividend, and shareholders may sell a stock dividend without realizing that they are diluting their ownership interest in the corporation. stock split is a proportional change in the number of shares owned by every shareholder. It differs from a stock dividend in degree; however, typically in a stock dividend no adjustment is made in the dividend rate per share while such an adjustment is usually made in a stock split. There are other technical differences in the handling of stock splits and stock dividends under the statutes of most states. Stock splits usually result in an increase in the number of outstanding shares.
What is a street name?
The common practice of registering publicly traded securities in the name of one or more brokerage firms with offices on Wall Street. Such certificates are endorsed in blank and are essentially bearer certificates transferred between brokerage firms.
What does strike suit mean?
It is a slang term for derivative litigation instituted for its nuisance value or to obtain a favorable settlement.
What does sub-chapter S refer to?
A tax option under the Internal Revenue Code of 1954 which permits certain closely held corporations to be taxed in a manner similar to that applicable to partnerships. Under Subchapter S corporate income is taxable directly to shareholders whether or not actually distributed to them. Subchapter S was designed to eliminate the double taxation problem. However, the provisions of Subchapter S are complex and create a number of unique problems not present in the tax treatment of partnerships.
Who are subscribers?
Persons who agree to invest in the corporation by purchasing shares of stock. Subscribers usually commit themselves to invest by entering into contracts defining the extent and terms of their commitment; at common law subscribers usually executed "subscriptions" or "subscription agreements."
What does subscription mean?
An offer to buy a specified number of theretofore un-issued shares of a corporation. If the corporation is not yet in existence, a subscription is known as a pre-incorporation subscription, which is enforceable by the corporation after it has been formed and is irrevocable despite the absence of consideration or the usual elements of a contract.
What is a subsidiary?
A corporation that is at least majority owned, and may be wholly owned, by another corporation. surplus is a general term in corporate accounting that usually refers to either the excess of assets over liabilities or that amount further reduced by the stated capital represented by issued shares. Surplus has a more definite meaning when combined with a descriptive adjective, e. g., earned surplus, capital surplus, or reduction surplus.
What are tainted shares?
Shares owned by a person who is disqualified for some reason from serving as a plaintiff in a derivative action. The shares are "tainted" since for policy reasons a good faith transferee of such shares will also be disqualified from serving as a plaintiff.
What is meant by takeover attempt or takeover bid?
These are generic terms to describe an attempt by an outside corporation or group, usually called the aggressor or "insurgent" to wrest control away from incumbent management. The object of a takeover attempt is usually referred to as the target. A takeover attempt may involve purchase of shares, a tender offer, a sale of assets or a proposal that the target merge voluntarily into the aggressor.
What is a target corporation?
A corporation the control of which is sought by an aggressor corporation.
What is a tender offer?
A public invitation by an aggressor that shareholders of a target corporation tender their shares for purchase by the aggressor at a stated price. Tender offers are regulated by the Williams Act that amended the Securities Exchange Act of 1934.
Who or what is a transfer agent?
An organization, usually a bank, which handles transfers of shares for a publicly held corporation. Generally, a transfer agent assures that certificates submitted for transfer are properly endorsed and that there is appropriate documentation of the right to transfer. The transfer agent issues new certificates and oversees the cancellation of the old ones. Transfer agents also usually maintain the record of shareholders for the corporation and mail dividend checks.
What are treasury shares?
Shares that were once issued and outstanding but which have been reacquired by the corporation and "held in its treasury." Treasury shares are economically indistinguishable from authorized but un-issued shares but historically have been treated as having an intermediate status. Many of the complexities created by treasury shares revolve around accounting concepts.
What is a triangular merger?
A method of amalgamation of two corporations by which the disappearing corporation is merged into a subsidiary of the surviving corporation and the shareholders of the disappearing corporation receive shares of the surviving corporation.
What is ultra vires?
The doctrine relating to the effect of corporate acts that exceed the powers or the stated purposes of a corporation. The modern view generally validates all corporate acts even though they may be ultra vires.
Who are underwriters?
Persons who buy shares with a view toward their further distribution. Used almost exclusively in connection with the public distribution of securities, an underwriter may be either a commercial enterprise engaged in the distribution of securities (an investment banker), or a person who simply buys securities without an investment intent and with a "view" toward further distribution.
What is an up stream merger?
A merger of a subsidiary corporation into its parent.
What is a voting trust?
A formal arrangement by which record title to shares is transferred to trustees who are entitled to exercise the power to vote the shares. Usually, all other incidents of ownership, such as the right to receive dividends, are retained by the beneficial owners of the shares.
What are voting trust certificates?
Certificates issued by voting trustees to the beneficial holders of shares held by the voting trust. Such certificates may be as readily transferable as the underlying shares, carrying with them all the incidents of ownership of the underlying shares except the power to vote.
What is a warrant?
A type of option to purchase shares issued by a corporation. Warrants are typically long period options, are freely transferable, and if the underlying shares are listed on a securities exchange, are also publicly traded. The price of warrants of publicly held corporations will obviously be a function of the market price of the shares and the option price specified in the warrants.
What are watered shares?
Par value shares issued for property which has been overvalued and is not worth the aggregate par value of the issued shares. Watered shares are often used as a generic term to describe all shares issued for less than par value. The issuance of watered shares may impose a liability on the recipient equal to the amount of the shortfall from par value.
What does white knight mean?
A slang term for a friendly suitor in a takeover attempt solicited or encouraged by the target.
What is working capital?
A measure of a corporation's liquidity and ability to discharge its liabilities as they come. Working capital is the difference between current assets and current liabilities as shown on the corporation's balance sheet.

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