2007 David K. Linnan

LEGAL CAPITAL BACKGROUND

Prof David K. LinnanLAWS #600

September 12, 2007

2007 David K. Linnan

HISTORYUNDERSTANDING HISTORY, OR WHAT IS THE

PURPOSE OF THE HUMAN APPENDIX

Legality of consideration for shares tied into traditional share capital system as proto-creditor protection (forgetting bankruptcy or fraudulent transfer law in parallel)

19th century theory of legal capital as actual pool of assets in the corporation, to be protected for the benefit of creditors

ORIGINAL VIEW OF “PAR VALUE” WAS THAT IT WAS SUPPOSED TO BE THE ACTUAL PURCHASE PRICE OF THE SHARES

2007 David K. Linnan

PAR VALUEPROBLEMS TO BE ANTICIPATED WITH PAR VALUE AS PURCHASE PRICE

What if you pay cash, any valuation problems?

[At inception no, but what happens with subsequent sales at higher or lower prices?]

What happens if you pay in real property, for example?

[Valuation issues, plus what of fluctuating valuations, since for example we are currently encountering a housing recession with values down 2%-5% in many places, etc.]

What happens if you have collusive valuations (eg, property worth $10, but recorded as worth $100)?

[Both valuation and “watered stock” issue, watered stock being stock paid for with consideration less than par value]

What happens if you issue stock for no cash or property consideration?

[Alternatively, the future services problem where the true consideration not even paid yet, or a past services problem to the extent the issuance is so-called “bonus shares,” but deal with under “legal capital” concepts like paid in capital, retained capital, additional capital, surplus capital still visible in the shareholders’ equity portion of the balance sheet]

2007 David K. Linnan

LEGAL CAPITALLEGAL CAPITAL & RMBCA VS DELAWARE

Pre-1980 RMBCA kept old legal capital system, now post-1981 transformed into unlawful distributions system under RMBCA Section 6.40 (but par value survives as taxation and marketing concept, for example)

What happened to the underlying questions like valuation of non-cash consideration, future services, etc. for share purchase?

Delaware has formally kept the older legal capital system, except it is so easily manipulated in changing or reducing capital that protection of creditors is de minimis

Again, what happened to the underlying questions like valuation of non-cash consideration, future services, etc. for share purchase?

WE SHALL LOOK AT LEGAL CAPITAL SYSTEM AGAIN IN NEXT 10 DAYS, THIS SUFFICIES SO THAT YOU UNDERSTAND ENOUGH TO DO LEGALITY OF CONSIDERATION FOR SHARES PRESENTLY

2007 David K. Linnan

EXAMPLESEDGAR & FINANCIAL STATEMENTS

There will be a separate distribution of accounting statements to be found on EDGAR for our class and test purposes, but to start with two we shall use US Dry Cleaning Corporation and Touchstone Resources USA, Inc.

Look at US Dry Cleaning balance sheet for a minute to see what legal capital for a Delaware corporation looks like:

http://www.sec.gov/Archives/edgar/data/920317/000101968707001141/usdry_sb2a3-041907.htm