1.2.3 - RIGHTS OF COMMON STOCK OWNERSHIP

TRUE OR FALSE? Companies may issue both voting and nonvoting common stock, normally differentiating the issues as Class A and Class B, respectively.

TRUE

What is known as the most junior security?

The common stock. The common stock is last in line in a corporate liquidation.

How many types of votes are there for stockholders? What are they called?

There are 2 types of votes for stockholders. Statutory Voting or Cumulative Voting

If a proxy cote could change control of a company (a proxy contest), all persons involved in the contest must complete what?

- All persons involved must register with the SEC as participants or face criminal penalties. - This registration requirement includes anyone providing unsolicited advice to stockholders about how to vote.

What is statutory voting?

- Allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD. - A board candidate needs a simple majority to be elected.

Which of the following DO shareholders vote on? -Dividend-related matters -Stock Splits -Board Members -Issuance of common stock -Issuance of preferred stock -Convertible securities

-Stock Splits -Board Members -Issuance of common stock -Issuance of preferred stock -Convertible securities

What is the antidilution provision?

A corporation may be required by law, or offered by the corporate charter to offer securities to its common stockholders before the general public, when a corporation raises capital through the sale of additional common stock.

What is a proxy?

A form of an absentee ballot.

What is cumulative voting?

Allows stockholders to allocate there total votes in any manner they choose.

Which type of voting allows stockholders to allocate their total votes in any manner they choose?

Cumulative voting

What is a preemptive right?

A preemptive right is the right of a stockholder to purchase enough newly issued shares to maintain their proportionate ownership in the corporation.

What is it called when a proxy vote can change control of a company?

A proxy contest.

What is it called when a company sends proxies to shareholders, usually for a specific meeting?

A proxy solicitation.

Which of the following securities carries the greatest amount of risk? A) Common stock. B) Debentures. C) Preferred stock. D) Corporate bonds.

A) Common stock. Common stockholders are always the last to receive payment in the event of a corporate liquidation and, therefore, have the most risk. However, common stockholders have the greatest potential reward of ownership if the corporation is successful. Reference: 1.2.3.6 in the License Exam Manual

A corporation must have stockholder approval to: A) issue convertible bonds. B) repurchase 100,000 shares of stock for its treasury. C) declare a 15% stock dividend. D) declare a cash dividend.

A) issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend. Reference: 1.2.3.1 in the License Exam Manual

When compared to statutory voting, cumulative voting gives an advantage to: A) minority stockholders. B) participating preferred stockholders. C) management rather than the board of directors. D) majority stockholders.

A) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board. Reference: 1.2.3.1.1 in the License Exam Manual

What is another name for nonvoting common stock?

Another name for nonvoting is limited voting common stock.

A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways? A) 300 votes for each of 2 directors. B) 200 votes for each of 3 directors. C) 600 votes for any 1 director. D) 100 votes for each of 6 directors.

B) 200 votes for each of 3 directors. A stockholder has 1 vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of 3 seats. Reference: 1.2.3.1.1 in the License Exam Manual

Holders of common shares may generally vote on: A) which member of the board of directors should be chairman. B) whether an administrative assistant should be promoted to management. C) whether the company should issue additional preferred stock. D) whether a cash dividend is to be declared.

C) whether the company should issue additional preferred stock. Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilutes the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation. Reference: 1.2.3.1 in the License Exam Manual

Which of the following do shareholders NOT vote on? -Dividend-related matters -Stock Splits -Board Members -Issuance of Additional -Equity Related Securities

Dividend-related matters such as when they are declared and how much they will be.

TRUE OR FALSE? Inspection of Corporate Books Inspection rights include the right to examine detailed financial records or the minutes of BOD's meetings.

FALSE Stockholders have the right to receive annual financial statements and obtain lists of stockholders. Inspection rights DO NOT include the right to examine detailed financial records or the minutes of BOD's meetings.

TRUE OR FALSE? A stockholder cannot revoke a proxy before the company tabulates the final vote at its annual meeting.

FALSE A stockholder CAN revoke a proxy at any time before the company tabulates the final vote at its annual meeting.

TRUE OR FALSE? Issuing nonvoting stock allows a company to raise additional capital while maintaining management control and continuity, diluting voting power.

FALSE Issuing nonvoting stock allows a company to raise additional capital while maintaining management control and continuity, WITHOUT diluting voting power.

TRUE OR FALSE? Stockholders are not owners of a company.

FALSE Stockholders are owners of a company.

Statutory voting benefits large shareholders or smaller investors?

Large shareholders

What is limited liability?

Limited liability protects stockholders from having to pay a corporation's debt in bankruptcy. *Stockholders cannot lose more than the amount they have paid for a corporation's stock for limited liability*

Are brokers who advise customers who request advice considered to be participants in a proxy contest?

No, brokers are not considered participants in a proxy contest for advising their customers.

The information for a proxy solicitation can be submitted to whom for review?

Securities and Exchange Commission (SEC) can review the information for the proxy solicitation.

Cumulative voting benefits large shareholders or smaller investors?

Smaller investors

TRUE OR FALSE A proxy be canceled if a stockholder attends the meeting, authorizes a subsequent proxy, or dies.

TRUE

TRUE OR FALSE? The common stockholder is at the bottom of the liquidation priority list.

TRUE

TRUE OR FALSE? Preemptive rights give investors the right to maintain a proportionate interest in a company's stock.

TRUE

TRUE OR FALSE? Stockholders have the right to vote on the issuance of convertible securities. Yes or no? Why?

TRUE YES Because the issuance of convertible securities will dilute current stockholder's proportionate ownership when converted (changed into shares of common).