“The people's good is the highest law” — Cicero
Ownership of a Corporation (part A)
by
Charles Lamson
The capital stock of the corporation is the declared money value of its outstanding stock. The owners subscribe and pay for the stock. Generally, not all of the stock a corporation may issue need be subscribed and paid for before the corporation begins operation. The amount of capital stock authorized in the charter cannot be altered without the consent of the state and the majority of the stockholders. The capital stock is divided into units called shares.
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Ownership
A person achieves ownership in a stock organization by acquiring title to one or more shares of stock. Owners are known as shareholders or stockholders. A person may obtain shares of stock by subscription either before or after organization of the corporation, or shares may be obtained in other ways, such as buy gift or purchase from another shareholder.
Stock Certificate
The amount of ownership (the number of shares owned) may be evidenced by a stock certificate. It is not the actual stock, just written evidence of ownership of stuck. The certificate shows on its face the number of shares represented, the par value of each share if the stock has a par value, and the signatures of the officers. The person who is named on the certificate, either by issuance or endorsement, and has possession of it is the owner of the certificate.
Classes of Stock
Stock is divided into many classes. The articles of incorporation (document or charter that establishes the existence of a corporation in the United States and Canada) and the laws under which the corporation is organized determine the classes. The two principal classes of stock are:
Common stock
Common stock is the simplest form of stock and the normal type of stock issued. The owners of common stock control corporation because they may vote for members of the board of directors. The board in turn hires the individuals who manage and operate the corporation. Unless selected as a director or appointed as an officer, a stockholder has no voice in the running of the corporation beyond the annual vote for the board of directors.
Common stockholders have the right to a share of the assets of a corporation upon dissolution.
Preferred Stock
Preferred stock differs from common stock in that the holder of this stock has some sort of special advantage or preference. In return for a preference, the preferred stockholders usually give up two rights common stockholders retain---the right to vote in stockholders' meetings and the right to participate in profits beyond the percentage fixed in the stock certificate.
The preference granted may pertain to the division of dividends, to the division of assets upon dissolution, or to both of these. Most often, the preference relates both to dividends and assets. Calling particular stock preferred does not tell what preference the holder has. The stock certificate will indicate the type of preference, although the certificate of incorporation governs the exact rights of preferred stockholders. Preferred stock may be:
Preferred as to Assets. Stock preferred as to assets gives the holder an advantage only in the event of liquidation. Preferred stockholders receive their proportionate share of the corporation's assets prior to any share going to common shareholders.
Preferred as to as Dividends. Stock preferred as to dividends means the preferred stockholders receive a dividend before any common stockholders do. Preferred stock usually states the percentage it received. Once this percentage has been paid to preferred stockholders, any money remaining may be paid as a dividend to holders of common stock. This right to preference as to dividends maybe cumulative or non-cumulative.
Cumulative preferred stock is preferred stock on which all dividends must be paid before the common stock receives any dividend. These dividends on cumulative preferred stock must be paid even for years in which the corporation did not earn an adequate profit to pay the stated dividend.
Noncumulative preferred stock is preferred stock on which dividends have to be paid only for the current year before common stock dividends are paid. Thus, dividends do not have to be paid for years in which the corporation does not make a profit or even for years in which the directors simply do not declare a dividend.
The difference between cumulative and non-cumulative preferred stock can be significant if the corporation operates at a loss in any given year or group of years. For example, a corporation that has $1 million outstanding common stock and $1 million outstanding 7 percent preferred stock operates at a loss for two years and then earns 21 percent net profit the third year. Non-cumulative preferred stock would be entitled to only one dividend of 7 percent. The common stock is entitled to the remaining 14 percent. Cumulative preferred stock would be entitled to 3 preferences of 7 percent, or 21 percent in all, before the common stock is entitled to any dividend. If the company earned a net profit each year equal to only 7 preferred on the preferred stock, and the preferred stock was noncumulative, the directors could pass the dividend the first year and declare a 7 percent dividend on both the common and the preferred stocks for the second year. Since the common stockholders elect the directors, the common stockholders could easily elect directors who would act in ways to help them as much as possible. For that reason, the law provides that preferred stock be cumulative unless specifically stated to be noncumulative. All this can occur, however, only when the corporation earns a profit but fails to declare a dividend. Unless the stock certificate expressly state that it is cumulative, the preference does not cumulate in the years during which the corporation operated at a loss.
Participating. Shareholders with participating preferred stock are entitled to share equally with the common shareholders in any further distribution of dividends made after the common shareholders have received dividends equal to those that the preferred shareholders have received by virtue of their stated preference. Thus, 7 percent participating preferred stock may pay considerably more than 7 percent annually. If the preferred stock is to participate, this right must be expressly stated on the stock certificate and in the articles of incorporation. It can participate only according to the terms of the articles of incorporation. The Articles May provide that the preferred stock shall participate equally with the common stock. On the other hand the articles may provide, for example, that the preferred stock is entitled to an additional 1 percent for each additional 5 percent the common stock receives.
Nonparticipating. Non-participating preferred stock is stock on which the maximum dividend is the percentage stated on the stock. If it is 7 nonparticipating preferred, for example, 7 percent annually would be the maximum to which the preferred stockholders would be entitled no matter how much the corporation earned. The law presumes stock is nonparticipating in the absence of a provision to the contrary in the articles of incorporation.
*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 418-421*
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