Issuance Of Shares

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 402-418

PART A. SHARE SUBSCRIPTIONS

AND UNDERWRITING

§ 16.1 Nature and Form

of Subscrip tion Agreeme nts

One may become a shareholder either by (1) subscription contract with the

corporation for the issue of new shares; (2) purchase from the corporation

of treasury sha res—that is, shares already issued and reacquired by t he

corporation; or (3) transfer from an existing holder of outstanding shares,

with the new owner being subst ituted in the place of the transferor.1 Share

subscribers are persons who have agreed to take and pay for the origi nal

unissued shares of a corporation, formed or to be formed.2 A subscription

differs from a contract of sale, a subscription being a contract for t he cor-

poration to issue or create new shares, as contra sted with an agreement by

a stockholder for the transfer of tit le to issued shares or shares to be issued.3

Unless the corporate statute or charter requires otherwise, a sub-

scription can be oral or written, as long as it is sufficiently definite to

satisfy the requ irements for a valid contract. This minima lly requires

evidence of an agreement to purchase a given number of shares in the

corporation at a specified price.4 The states are split as to whether a sub-

scription for stock must be in writ ing and signed by the subscriber to be

enforceable. Approximately one half of the states follow the scheme of

the current Model Business Corporation Act or its predecessor by not

requiring that the subscription be in writing to be enforceable.5 Even in

jurisdict ions that do require a wr itten contract, the subscriber’s conduct

may estop him from raising the absence of a written ag reement as a

defense.6 And i n one case, the court interpreted the statute’s requirement

of a written agreement as affording a defense only to the subscr iber; the

corporation could have had an unwritten agreement enforced against it

by the subscriber.7 However, courts frequently have held a subscription

for stock subject to the statute of frauds, li ke an agreement for the sale

of goods, wares, merchandise, or choses in action.8

§ 16.2 Pre-incorporation Subscriptions—

Revocability

The subscriber’s power to revoke a stock subscription today is cir-

cumscribed by state corporation statutes, which generally render pre-

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incorporation subscriptions irrevocable for a certain period of time,

most frequently six months, unless otherwise agreed or unless al l other

subscribers agree to t he release.9 In the absence of a statute, courts have

sometimes found it diff icult to determine the legal principles applicable

to pre-incorporation subscriptions.

§ 16.3 Liability on Unpaid Subscriptions

to Corporations and Creditors

Under modern statutes, a corporation’s board of directors may determine

the payment terms of pre-incorporation subscriptions if the subscrip-

tion agreement does not specify them.10 A subscriber’s default creates a

debt due to the corporation, which may be accordingly collected.

Unless liability is imposed by statute, neither subscribers nor share-

holders are directly accountable to the corporation’s creditors.11 The

subscriber’s liability is to t he corporation and is pursued by its repre sen-

tatives.12 In the absence of receivership or bankruptcy proceedings, the

usual remedies available to corporate creditors to reach t he indebted-

ness of sh areholders for par tly paid shares is a creditors’ bill in equit y or

garnishment, in which creditors must show they have exhausted t heir

remedies at law or are excused from doing so.13

§ 16.4 The Underwriting Services

of Investment Bankers

It is important for business lawyers to u nderstand the nature of t he

underwriting arrangements commonly used by issuers and investment

bankers in bringing out and distributing issues of corporate securities.

However, lawyers should also be aware that securities may be “distrib-

uted” to the investing public direct ly by the management of a going

corporation or by the promoters of a new enterprise, without the aid of

investment bankers or t he use of an underwriting agreement. Smal l con-

cerns often cannot afford underwriting by i nvestment bankers and must

rely on corporate officers and agents to sell secu rities. Large concerns are

som etim es abl e to pl ace l arge issu es of h igh- grad e sec urit ies d ire ctly wit h

life insura nce companies, pension fu nds, or other institut ional investors.

In direct private f inancing, underw riting comm issions are saved, as are

other expenses such as registration under the secu rities laws.

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