Agriculture Reference
In-Depth Information
for forming a corporation exist among the various states. Individual state laws and statutes
must be carefully considered by those who wish to form a corporation. Selection of an attor-
ney who is well versed in the corporate law of the specifi c state of interest is essential to
avoid potentially serious organizational problems in the agribusiness corporation.
Stock of the corporation
When corporations are formed, shares of stock are sold to those who are interested in invest-
ing and risking their money in the enterprise. A share of
stock
is a piece of paper, in
prescribed legal form, which represents each person's amount of ownership in the corpora-
tion.
Common stock
normally carries the privilege of voting for the board of directors that
oversees the activities of the corporation.
Preferred stock
differs from common stock
in that it is usually nonvoting, and has a preferred position in receiving dividends and in
redemption in the case of liquidation. Thus, voting rights are exchanged for lower risk on the
investment of capital in the corporation.
Each state has what are commonly called
blue-sky laws
, which regulate the way in
which corporate stock may be sold and which protect the rights of investors (the origin of
the term is a bit obscure—some people attribute it to a former Supreme Court Justice
who wrote about companies selling stock which was not worth much more than a
“patch of blue sky;” others state that it arose because criminals were willing to sell naïve
investors a “piece of the great blue sky,” and these laws were enacted to protect against this).
Individual state laws must be consulted prior to the sales of stock in a corporation. The
most common way of fi nancing corporations is through the sales of stock, but fi nancing
through bonds, notes, debentures, and numerous means of borrowing against assets is also
practiced.
Thus, there are two specifi c types of stockholders in a for-profi t corporation. Common
stockholders are willing to take risk. They invest in the corporation typically because they
believe the value of their stock will increase over time (this increase in value comes about as
the fi rm invests in new and additional assets, inventory and technology, combined with a
typical increase in brand value—known as “goodwill”). They are also the true owners of
the business. At the annual meeting, common stockholders are the ones that vote for the
board of directors of the corporation. Each common stockholder has one vote per share of
common stock. Some corporations have started issuing nonvoting common stock, but this is
not prevalent across most corporations.
Those who desire to control a business may embark on an attempt to acquire the majority
of shares of a fi rm. Also, current stockholders can sign a proxy vote that allows an individual
to vote for them at the annual meeting. Many well-publicized attempts to take over corpora-
tions are noted as “hostile takeovers.” In these sorts of cases, current corporate management
does not desire to lose their control of the fi rm. Proxy fi ghts may ensue, where the takeover
candidate attempts to gain control by enlisting stockholder approval or by simply bidding at
a higher level than the current market price for outstanding shares.
In contrast, preferred stockholders tend to take less risk on their investment in the
corporation. The price of preferred stock typically fl uctuates less than common stock in
publicly traded corporations. Also, preferred stockholders often invest for the dividends
granted by the corporation. Once a fi rm has established a trend of paying quarterly
dividends, management may not wish to break the record. Thus, some fi rms, even in
an economic downturn, may choose to borrow money to pay their quarterly dividends to
preferred shareholders.
