Keeping track of company ownership.
The importance of keeping good stock records, and the potential cost of not doing so, came to light in a recent transaction. A manufacturing company had dozens of stockholders and had been issuing (and allowing transfers of) its stock for decades. Ultimately, the company was sold by way of a merger in which the shares of the company were exchanged for cash and securities of another company. Consequently, the thoroughness of the stock records was important.
Luckily, the company had kept pretty good records, so few issues presented themselves. Had that not been the case, the buyer would likely have required a significant escrow of funds and broad indemnification by the shareholders, or the buyer could have felt uncomfortable enough about the issue to walk away from the deal.
Therefore, it is a good idea to have clean stock records from a business perspective, but it becomes imperative when you want to undertake a major company event, such as a sale (or even financing) of the company.
There are generally three components to good stock record keeping: the stock ledger, the stock certificate and the authorizations necessary for the issuance
The stock ledger
The stock ledger is a company's internal bookkeeping of stock issuances, transfers and redemptions. It is like a road map or chronological history of a company's ownership. A good stock ledger contains the following information about each stock certificate:
* The certificate number
* The name or title of the stockholder
* The number of shares issued
* The date of issuance
* Whether it is an original issuance or a transfer or redemption from another certificate
As an additional good business practice, it would be prudent to note on the stock certificate or the ledger the number of shares that are authorized to be issued by the company (this is set forth in the company's articles of organization that are filed with the secretary of state). Moreover, if the company is authorized to issue more than one class of stock, then the number of each class of stock authorized should be understood. The total number of shares of stock issued (represented by outstanding stock certificates) should not exceed the amount of authorized stock of each such class.
A stock certificate has important legal significance Generally speaking, it can be endorsed and transferred from one person to another. The person or entity whose name appears on the stock certificate (by endorsement or otherwise) is likely entitled to all the rights and remedies of a stockholder in the company.
This could include the power to vote those shares and the economic rights to dividends, among other statutory rights.
Although a "standard form" of stock certificate does not exist, under New Hampshire and most states' laws, each stock certificate must contain the name of the company and that it is organized under New Hampshire law, the name of the person that it is issued to and the number and class of shares the certificate represents. Moreover, each share certificate must be signed by two officers designated in the company's bylaws or by its board of directors.
Also, any restrictions on the transfer or voting of the stock should be conspicuously noted on the stock certificate itself.
Unless otherwise prohibited by the company's governing documents, the board of directors has the authority to issue shares of stock for adequate consideration.
Consideration can take many forms, including tangible or intangible property or other benefit to the company, including cash, promissory note or services performed or to be performed. It is important to note in the records of the company that the board of directors (and/or shareholders, if otherwise required) has authorized the issuance of the shares. In particular, that authorization should include the name of the recipient, the number of shares issued, and the consideration received (or to be received) by the company in exchange for the stock.
Maintaining good stock records is an excellent business practice, but when it comes time for extraordinary events, the stock records will likely become the focus of significant scrutiny. It is always better and easier to deal with these issues contemporaneously instead of waiting for these extraordinary moments to occur.
John Bentas, a member of the Corporate Department at the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1306 or email@example.com.
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|Title Annotation:||Business Toolbox|
|Publication:||New Hampshire Business Review|
|Date:||Aug 12, 2011|
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