Stock Issuance and Record Keeping Best Practice Summary
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Before a corporation may issue stock it must have a sufficient
number of shares authorized in its charter currently on file with the domestic
secretary of state. If the company does not have enough remaining shares of authorized
stock for issuance, an amendment to the charter must be filed increasing the amount
of shares of authorized stock. Best
Practice Tip: Amending authorized stock may be very costly in some states.
Your service company may not opt to front a filing fee of several thousands of
dollars. Therefore, checking the filing fee ahead of time may be a timesaving
measure. A
certain amount of authorized stock must be issued as soon as practicable following
incorporation in order to provide statutory minimum paid-in capital or commence
business as provided by state
laws. All of the authorized stock may or may not be issued so long as the
total authorized stock is always equal to or greater than the amount of issued
stock. New stock
issuances always requires authorization of the board of directors and is issued
in exchange for some consideration that may be cash, property, services or debt.
Stock issuance may also be conditional upon the stockholder entering a stockholders'
agreement, stock subscription agreement, a stock transfer restriction agreement
or some form thereof. Directors must also observe any existing
stockholder rights, such as rights of first refusal, rights of first offer or
preemptive rights, that may prohibit the issuance of stock to a new stockholder
without first offering the stock to current stockholders. Once stock is issued
pursuant to the conditions listed above, it is referred to as being "issued
and outstanding" stock. The stockholder then owns "authorized, issued
and outstanding stock" and is a "holder of record". Stock
CertificatesDepending upon the bylaws, stock may be represented
by a stock certificate or it may be uncertificated. Uncertificated stock simply
means that stock ownership is recorded in the stock ledger but shares are not
represented by a stock certificate. Form of Stock Certificate The
form of stock certificates representing each class and/or series of capital stock
is adopted by a resolution of directors. The adopted form of stock certificate
must be used for all issuances unless or until a new form is adopted by a resolution
of directors. A specimen of the stock certificate adopted by the directors should
be attached to the consent or minutes and placed in the minute book. If a specimen
stock certificate is for some reason unavailable, a new stock certificate should
be adopted by the directors and used for future issuances.
Best Practice Tip: If only a black and white copy of a
certificate is located, you may order the exact certificate by using the GOES
number in the bottom left hand corner of the certificate. Every certificate has
a GOES number at the bottom left hand corner, such as GOES 352. This is basically
the inventory control number so that ordering the certificates using this number
will get you the exact certificate required. Form
of Stock Common Certificate Form
of Stock Preferred Certificate Contents of a Stock
Certificate Provisions for the contents of a stock certificate and signature
requirements may be found in the bylaws. Stock certificates may be computer-generated
or pre-printed forms depending upon the specimen adopted by the board of directors.
Generally, a stock certificate will contain: - Name of the
company;
- State of incorporation;
- Class, series and par value
of stock represented by the certificate;
- Exact name of the stockholder;
-
Number of shares issued to the stockholder;
- Any restrictions on transfer;
and
- Signature of two officers.
Restrictions
on Transfer Stock may be restricted by law, the charter, the bylaws or
by a stockholders agreement, stock restriction agreement or some other agreement
providing for preemptive rights, rights of first refusal, rights of first offer
or other preferences. In addition to optional restrictions that may apply as a
result of a stockholders' agreement, the bylaws and/or charter, other restrictions
may also be imposed by law such as: - S corporation status,
Section
1361 of the Internal Revenue Code (IRC) provides certain restrictions in order
to maintain S corporation status.
- Section
1244 of the Internal Revenue Code may also apply to and therefore restrict
the stock of a company.
- Stock is generally restricted under
federal securities laws from sale to the general public without registration under
the Securities
Act of 1933.
- Stock ownership of professional corporations
is often restricted by state
laws to only licensed professionals.
The most common
restriction noted on the reverse side of stock certificates is the statement that
the stock is not registered under the Securities Act of 1933 which must appear
all on certificates representing unregistered stock. The 1933 Act and state securities
laws, known as blue sky laws generally govern the public sale of securities and
are designed to protect the public by assuring that the company makes full disclosure
of all relevant information to any potential investor so that investors may make
sound investment decisions. Restrictive Legends Any
restrictions on the stock must be noted on the reverse side of stock certificate
pursuant to Article
8 of the Uniform Commercial Code (UCC) which states that "A restriction
on transfer of a security imposed by the issuer, even if otherwise lawful, is
ineffective against a person without knowledge of the restriction unless: (1)
the security is certificated and the restriction is noted conspicuously on the
security certificate; or (2) the security is uncertificated and
the registered owner has been notified of the restriction." Restrictions
on the back of stock certificates are known as "legends" Legends
(searchable collection) Stock Receipts A company
may maintain the original stock certificate or a stockholder may choose to possess
the stock certificate. If the stockholder opts for possession, a copy should be
made of both sides of the certificate and kept with the stock records of the company
together with a receipt evidencing the stockholder has received the stock certificate.
The receipt may be the stub of the certificate or a separate receipt. Sample
Receipt Stock Ledgers Stock ledgers may be Microsoft
Excel spreadsheet or Word table; or it may be contained in an electronic software
program such as Corporate Focus.
It is used to maintain the history of issuance and transfer of stock, verifying
current ownership. Carefully tracking ownership, issuance and transfer is vital
in order to assure all holders of record vote. If stockholders
prefer to hold original of stock certificates, copies of each certificate should
be kept in the stock record book together with a receipt evidencing that the stockholder
receipt. All stock certificates or copies are kept sequentially in the stock records
of the company. The chosen method of maintaining a stock ledger
may depend upon the size of the company and whether or not it plans to "go
public". If a company is on an IPO track, a stock ledger must be very carefully
maintained in such a manner that it may easily imported into a Form S-1, Initial
Registration Statement to be filed with the SEC. If the company is a closely-held
corporation with rare stock transfers a manual hand-writtten stock ledger would
likely suffice. Sample
Stock Ledger Transfer Agents Transfer agents are
companies, normally banks, financial institutions and in some cases, may be the
law firm, hired by companies to manage and maintain stock records particularly
when the company is public or plans to go public; or when the company has several
stockholders. The transfer agent maintains the stock ledger, tracks holders of
record, issues new stock certificates, removes legends when appropriate, stock
transfers and any other record maintenance.
Best Practice Tip: "Holders of record" are those
stockholders on the books as of the record date set for an upcoming annual or
special meeting. Only the stockholders on the books as to the record date are
eligible to vote at the meeting. Stock Transfers Once
stock is issued, a stockholder may choose to sell, transfer, or give away the
stock at any time. Absent any restrictions prohibiting such transfer, as previously
discussed, the stockholder may request the transfer by presenting to the company,
the stock certificate together with a transfer power stating the person to whom
the stock should be transferred. The stock certificate presented will be canceled
and a new stock certificate issued to the new stockholder. If the transferor has
any balance of stock, the balance will be issued on a new certificate. The stock
transfer power and cancel certificate is placed in the stock records book and
a notation referencing the transfer is inserted on the stock ledger. New stock
certificates are sent to the stockholders. If restrictions apply, the transfer
may be prohibited or restrictions need to be complied with. (Also see Rule
144.) Sample
Transfer Power
Best Practice Tip: If there is an error in preparing a
stock certificate, for instance, the stockholder's name was incorrectly spelled,
that stock certificate should be voided rather than canceled. This is similar
to the difference between voiding or canceling a check. A personal check is voided
when a mistake is made. But it is canceled when the money has been paid. Lost
Certificates and Replacement Certificates If the stock certificate has
been lost, the stockholder may request a replacement certificate by providing
an affidavit of loss indemnifying the company from any loss and stating that the
certificate has been lost and not otherwise transferred. Further, it states that
it is found, it will be forwarded to the company. The affidavit must be notarized.
Sample
Affidavit of Loss LeapLaw's Related
Best Practice Summaries
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