Colorado § 7-106-202 - Issuance of shares.

§ 7-106-202. Issuance of shares.

(1) The powers granted in this section to the board of directors may be reserved to the shareholders by the articles of incorporation.

(2) Subject to the limitations set forth in subsection (5) of this section, the board of directors may authorize the issuance of shares for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, and other securities of the corporation.

(3) Before the corporation issues shares, the board of directors shall determine that the consideration received or to be received for the shares to be issued is adequate. In the absence of fraud in the transaction, that determination by the board of directors is conclusive insofar as the adequacy of such consideration relates to whether the shares are validly issued, fully paid, and nonassessable.

(4) When the corporation receives the consideration for which the board of directors has authorized the issuance of shares, the shares issued therefor are fully paid and nonassessable.

(5) The promissory note of a subscriber or an affiliate of the subscriber for shares shall not constitute consideration for the shares unless the note is negotiable and is secured by collateral, other than the shares, having a fair market value at least equal to the principal amount of the note. For the purposes of this subsection (5), "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a nonrecourse note.

(6) Unless otherwise expressly provided in the articles of incorporation or bylaws, shares having a par value may be issued for less than the par value.

Source: L. 93: Entire article added, p. 756, § 1, effective July 1, 1994.

ANNOTATION

I. General Consideration.

II. Consideration for Issuance of Shares.

III. Promissory Notes and Future Services.

I. GENERAL CONSIDERATION.

Law reviews. For note, "Consideration for Stock Under the Colorado Constitution and Cases", see 29 Rocky Mt. L. Rev. 112 (1956). For comment on Burch v. Exploration Data Consultants, Inc. (33 Colo. App. 155, 518 P.2d 288 (1973)), see 46 U. Colo. L. Rev. 125 (1974). For article, "Counseling the Corporation In Financial Crisis", see 17 Colo. Law. 631 (1988).

Annotator's note. Since § 7-106-202 is similar to §§ 7-4-104 and 7-4-105 as they existed prior to the 1993 recodification of the "Colorado Business Corporation Act", articles 101 to 117 of title 7, cases construing those provisions and their predecessors have been included in the annotations to this section.

II. CONSIDERATION FOR ISSUANCE OF SHARES.

Under this section capital stock of a corporation is regarded as money or its equivalent. Robinson v. Dolores No. Two Land & Canal Co., 2 Colo. App. 17, 29 P. 750 (1892); Fulton Inv. Co. v. Smith, 27 Colo. App. 279, 149 P. 444 (1915).

And services and property to the value of the stock at par are a good consideration for its issue. Barnard v. Sweet, 74 Colo. 302, 221 P. 1093 (1923).

Designated water rights are a valid consideration for the payment of shares. Paulek v. Isgar, 38 Colo. App. 29, 551 P.2d 213 (1976).

The consideration must be reasonably worth the par value of the stock which is issued for it. Frink v. Carman Distrib. Co., 97 Colo. 211, 48 P.2d 805 (1935).

And it is presumed that in its original issue the stock of a corporation is paid in full, where nothing to the contrary appears. Henry v. Semonian, 27 Colo. App. 487, 150 P. 818 (1915).

Thus in a transaction whereby property is conveyed in consideration of the issuance of capital stock, such property is a valuable consideration. Fulton Inv. Co. v. Smith, 27 Colo. App. 279, 149 P. 444 (1915).

And an action lies for value of stock issued. The fact that the purchaser from a stockholder is without notice that the stock is issued for an insufficient consideration does not prevent an action for the value of corporate stock issued. Barnard v. Sweet, 74 Colo. 302, 221 P. 1093 (1923).

This section authorizes the directors of a corporation to sell or dispose of treasury stock for a consideration fixed by the board of directors. Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

And the fact that a corporation has a substantial financial loss in its transfer of the treasury stock to an employees stock trust is of no consequence, for § 7-3-101 (1)(p) anticipates and authorizes a corporation to create such plans "wholly or partly at the expense of the corporation". Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

A stock purchase warrant is purely an option to purchase stock that does not vest in the prospective purchaser an equitable title to, or any interest or right in, the stock. The value of such an option is speculative - any number of corporate or collateral events may change its value - and the burden of such risk falls on the holder of the warrant. Anderson v. Somatogen, Inc., 940 P.2d 1079 (Colo. App. 1996).

Unless the contract provides otherwise, a warrant holder may not complain, for example, when a corporation issues new capital stock, although such issue may lessen or destroy the value of the option. Therefore, whatever rights a stock purchase warrant holder may have to require the obligor corporation to maintain the integrity of the shares are purely contractual. Anderson v. Somatogen, Inc., 940 P.2d 1079 (Colo. App. 1996).

The precise protection afforded by an "antidilution" clause to a warrant holder will depend on the express terms of the contract itself. Anderson v. Somatogen, Inc., 940 P.2d 1079 (Colo. App. 1996).

Applied in Homestead Mining Co. v. Reynolds, 30 Colo. 330, 70 P. 422 (1902).

III. PROMISSORY NOTES AND FUTURE SERVICES.

Stocks and bonds issued except as provided in this section are in direct violation of Colo. Const., art. XV, § 9 and § 7-4-105 and are, thus, ipso facto invalid. Ark. River Land Co. v. Farmers' Loan Co., 13 Colo. 587, 22 P. 954 (1889); In re Dreiling, 233 B.R. 848 (Bankr. D. Colo. 1999).

Both § 9 of art. XV, Colo. Const. and this section are aimed at preventing the watering of corporate stock; their purpose is to prevent corporations from issuing stock without receiving full value, and so to prevent the diluting of the holdings of innocent stockholders and the reliance by creditors on false or nonexistent capital resulting from the issuance of "watered" stock. Haselbush v. Alsco of Colo., Inc., 161 Colo. 138, 421 P.2d 113 (1966).

The policy behind § 7-4-105 (2) and § 9 of art. XV, Colo. Const., is to protect other stockholders of the corporation, creditors, and good faith future stockholders from the dilution of their investment by "watered" stock. Burch v. Exploration Data Consultants, Inc., 33 Colo. App. 155, 518 P.2d 288 (1973).

But this purpose would not be served by holding that these provisions may be used to defeat an action by a corporation seeking to enforce payment on a promissory note given for the issuance of stock when the transaction has been made in good faith. Haselbush v. Alsco of Colo., Inc., 161 Colo. 138, 421 P.2d 113 (1966).

The fact that the stock the plaintiff had contracted to purchase became worthless prior to his having made final payment on the note does not entitle plaintiff to recover amounts paid, nor does it furnish a justification for a refusal to pay the remainder due under the terms of the note. Moneys paid and to be paid belong to the creditors of the defendant corporation. Jacobs v. Frontier Tractor & Equip., Inc., 712 P.2d 493 (Colo. App. 1985).

As this section does not forbid a corporation from taking a note or obligation from a perspective stockholder; on the contrary, it impliedly recognizes the right to do so, but declares that no such note shall be considered as payment and no certificate shall issue until the note is paid. Haselbush v. Alsco of Colo., Inc., 161 Colo. 138, 421 P.2d 113 (1966); Jacobs v. Frontier Tractor & Equip., Inc., 712 P.2d 493 (Colo. App. 1985).

Moreover, the issuance of the certificate does not affect the enforceability of the note. Haselbush v. Alsco of Colo., Inc., 161 Colo. 138, 421 P.2d 113 (1966).

Shares not rendered void. The fact that § 9 of art. XV, Colo. Const., and subsection (2) of this section may prohibit execution and delivery of share certificates in exchange for promissory notes does not render the shares void. Burch v. Exploration Data Consultants, Inc., 33 Colo. App. 155, 518 P.2d 288 (1973).