Under the MBCA Doug Linda and Laura unrelated parties plan

Under the MBCA ...

Doug, Linda and Laura, unrelated parties, plan to form a new corporation (“Newco”) under the laws of the state of Washington. Newco will issue 200 shares of common stock to Doug for $200,000. Linda has no money, but she has agreed to give Newco a $200,000 promissory note for 200 shares of Newco common stock. The note will bear interest at an annual rate of 4%, and all interest and principle will be due and payable in 10 years. Laura will be issued 200 shares of common stock as a “signing bonus” under an employment agreement that will require that she manager the company for five years for a base pay and bonus plan set forth in the agreement. The parties anticipate that Doug (a deep pocket player) will probably need to “pony up” more cash within a year or so. Their tentative thinking is that Doug will be issued preferred stock for any additional capital, and the specific terms of the preferred stock will be worked out at the time of his contribution. Regarding the formation the corporation, the parties ask that you advise them on the following questions:

1.Is it legal to issue common stock to the parties for the consideration each party has agreed to provide?

2.Should the common stock have a par value? Is this required? What are the benefits of having a par value?

3. Can any prefered stock issued to Doug in the future have voting rights?

4. Shoudl any preferred stock issued to Doug in the future be participating or cumulative prefered stock? why?

5. Can the preferred stock that Doug may receive down the road be authorized now in the articles of incorp even though the specific terms of the preferred will not be ascertained until later?

Solution

1. Yes, Comon stock can be issued to the parties for the consideration each party has agreed to provide, provided the same is agreed by all the shareholders and the members.

2. Yes, the common stock should have a par value. It is not always required, the common stock can have par, premium or discounted value with respect to situation. The benefits of having a par value is that the stock are sold at their actual face value and there would be no extra consideration attached with them. The common stock at par value are easy to issue and to handle.

3. Preferred stock does not generally voting rights only the common stock have the voting rights. Thus, no preferred stock can be issue to Doug in the future having voting rights.

4. Yes, the preferred stock can be participating and cumulative based on the conditions attached in the agreement to issue the stock. The participating stock is the one which will participate in future decisions whereas the cumulative are the one on which the dividend keeps on cumulating year to year in case of non-payment.

5. No, the preferred tcok can not be made authorized in the articls of incorporation until and unless the specific terms are asceratined,