Business Law 101 / Stock Ownership Comes With Many Privileges

 

By Albert  E.  Kelly

 

The last few articles have concentrated on various types of business organizations. Now, we are going to spend a little more time specifically on corporations.

 

 

 

The major difference between corporations and other business organizations is stock issuance. This is what makes a corporation what it is. It can issue stock. This allows it to raise capital and to easily transfer ownership.

 

 

 

If you invest in the stock market and buy a share of stock in IBM, you become an owner of IBM, albeit, a very minor one. However, as an owner, you have the right to attend their annual meeting to vote on who the corporate directors will be. You may also get to vote on certain salary issues and bonuses, mergers and acquisitions. You get the right to inspect the company books. You get the right to receive dividends when distributed. You get the right to receive assets if the company is dissolved. And most importantly for some, you get the right to file a shareholder’s derivative suit.

 

 

 

A shareholders derivative action is a lawsuit filed by a shareholder to force the directors and officers of a corporation to take action that would benefit the corporation. It also allows the shareholder to sue for damages caused by them to the corporation if they act improperly. It can also be used by minority shareholders to challenge actions of the majority shareholders and to ask for involuntary dissolution of the company.

 

 

 

How much stock can a corporation issue? As much as it wants, under certain restrictions. The articles of incorporation set out the number of authorized shares a company can issue. It does not have to issue all the shares that are authorized. If a company wants to issue more shares, it merely amends the Articles of Incorporation to allow for additional shares (I’m purposefully simplifying the process. More detailed discussions will be saved for later.). As an example of what a company can do, as of June 30, 2013, McDonald’s Corp. (yes, the burger people) authorized 165 million shares of preferred stock, but had not issued any and authorized 3.5 billion shares of common stock, but only issued 1,660,600,000 shares. Each one of these shares represents an ownership interest.

 

 

 

Stock has essentially three values: Par, book and market. Before investing in any company, it is important to know the definition of these values to understand what you are buying.

 

 

 

Par value is the same as face value for the initial issuance of stock. It is the amount that the share is mandated to be initially issued for. Not all stock has a par value. While par value was required several years ago, it no longer is. However, many companies, especially small ones, still use par value as a way of fixing the initial value for later tax purposes. McDonald’s Corp. set a par value on its common stock at $0.01.

 

 

 

Book value is derived from taking the value of all the assets of the corporation, divided by the number of shares issued by the company. For McDonald’s, in 2013, its total value was listed at $34,453,400,000. This gives a book value of roughly $20.75 per share.

 

 

 

Market value is what the shares actually sell for. As of Sept. 15, 2013, McDonald’s shares traded for $97.35 per share; however, their 52 week low was only $83.31, while their 52 week high was $103.70.

 

 

 

I mentioned above two types of stock, preferred and common. Common stock is just that – common. It usually means that the owner (also called holder or bearer) gets to cast one vote for each share he owns and that he shall get no preferential treatment over any other shareholder. Preferred stock is usually non-voting stock, but it gets priority when it comes to receiving dividends or a division of assets upon dissolution of the company. That means that the preferred shareholders get paid first; the common shareholders only get paid if there is money left.

 

 

 

Usually, stockholders can sell, trade, give or bequeath their shares to anyone. Occasionally, stock is restricted so that transfers are only allowed after certain procedures have been followed, such as offering to sell to other shareholders first. Once a share of stock has been purchased, possession of the share is not enough. The shareholder needs to ensure that the transfer has been registered in the corporate records. Only those shareholders listed in the corporate register will be allowed to vote or participate in corporate issues.

 

 

 

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

 

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