Stott, Grady B.

English

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"BLANK STOCK" TECHNIQUES IN NORTHCAROLINAGRADY B. STOTT*The corporation laws of most states provide that thenumber (or amount) of shares and the characteristics ofthe shares are to be set forth in the certificate of incorpora-tion. Consequently, if the corporation seeks to issue stockdiffering in any detail from the provisions in the certificatethere must be a charter amendment. To avoid the delay,trouble and expense of stockholders meetings and the requi-site filings, the statutes of a number of states authorize theinsertion in the certificate of incorporation of a grant ofauthority to the directors to determine, by directors' reso-lution, the characteristics of the shares to be issued.1Accordingly, one may find in the certificate of incorpora-tion in those states a bare statement of the total amount(or number) of shares which the corporation is authorizedto issue, or perhaps a general statement classifying theshares into classes (e.g., common and preferred), but withno specifications of details of the various characteristics ofdiffering classes or series of shares; instead a charter clauseis found authorizing the directors to fix the characteristicsof any issue of shares. Hence the term "blank stock". 2While North Carolina statutes do not authorize "blankstock", in the sense of giving the directors power to fill inthe details left unstated in the charter provisions that con-stitute the basic authorization for the shares in question,a statute has provided since 1903:"Every corporation has power to create two ormore kinds of stock of such classes, with such des-ignations, preferences, and voting powers or re-* 2nd Year Law Student, Duke University; A.B. Duke University1947.2 DEL. REv. CODE c. 65, § 13 (1935);MniN. Bus. CoRiP. AcT, § 301.14(1945); CALIF. Coap. C.A. § 304 (1947); Mi. AM. CODE § 42 (1939).2 This term seems to have been first used in Berle, Investors and theRevised Delaware Corporation Act, 29 COL. L. REv. 563 (1929).DUKE BAR JOURNALstrictions or qualifications thereof as are prescribedby those holding a majority of its outstanding cap-ital stock entitled to vote."3One question suggested is whether under the statute theshareholders may by resolution authorize an issue of shareseither in excess of the charter limit or differing from suchcharacteristics as may have been stated in the charter. Theanswer seems clearly: No. The statutory provision pre-scribing the contents of the certificate of incorporationrequires that the amount of the total authorized capitalstock, number of shares into which it is divided, par valueof each share (if the shares have par value),4 and, if morethan one class, a description of the different classes, be setforth in the certificate of incorporation.5 Moreover, thenumber (and amount) of the total authorized shares ofcapital stock stated in the charter determines the amountof organization tax paid to the state.6 To permit stock-holders to create shares in excess of charter limits woulddeprive the state of statutory fees. If the charter limit isto be exceeded, then an amendment under the statute iscalled for.7 As for creation of shares inconsistent with thecharter, this would seem to be precluded by the very conceptof the charter being the basic framework for a corporation.For example, if the charter provides only for par shares, it3 N.C. GEN. STAT. § 55-61 (1943). The statute originally required avote of those holding two-thirds of the capital stock outstanding. Seeamendment, Sec. 2, Chapter 118, Public Laws of N.C. (1925). Two-thirds vote is still required if new shares are to have priority In divi-dends or distribution over existing preferred.Perhaps out of excess caution, draftsmen of charters of North Caro-lina corporations sometimes insert in the charter, as part of the clausesrelating to the capital stock, a provision to the effect that the sharesmay be issued with such designations, preferences, and voting powersor restrictions thereof as are prescribed by those holding a majorityof its outstanding capital stock entitled to vote. Such a charter clause,however, would not seem necessary to enable the stockholders to exer-cise the "blank stock" authorization of the statute.I If the shares are to be without par value the total number author-ized must be stated in the certificate of incorporation. N.C. Gr.N. STAT.§ 55-75 (1943).5 N.C. GEN. STAT. § 55-2 (1943).6 N.C. Ga. STAT. § 55-158 (1)(2)(4) (1943).7 N.C. GEN. STAT. §55-61 (1943)."BLANK STOCK" TECHNIQUES IN N. C.would be awkward, to say the least, for the stockholders tocreate no-par shares.The North Carolina statute has certain advantages infacilitating an issue of securities involving registrationwith the Securities and Exchange Commission. Such regis-tration is almost always a race against time as the auditfigures required for registration cannot be more than ninetydays old.8 Accordingly, the issuer corporation will endeavorto get the issue out within ninety days after the close ofthe annual audit period. Using figures of that period savestime and expense of an additional audit. It is thereforeessential to avoid any delay that would prevent the Regis-tration Statement filed with the SEC from becoming effect-ive within the ninety day period.However, market conditions may change rapidly, necessi-tating corresponding changes in dividend rates, redemptionfigures or other characteristics of an issue of stock, andexisting charter provisions fixing the details of an authorizedstock not yet issued may be quite inadequate for presentmarket demands. It is highly important to carry out anynecessary changes in a proposed new issue as quickly aspossible so as to make the appropriate amendment to aRegistration Statement with all possible dispatch. Everynew amendment to a Registration Statement starts thetwenty day waiting period all over again.9 Although cer-tain kinds of amendments if filed with the consent of theSEC and with request for acceleration may be treated asbeing part of the Registration Statement as originally filed;such amendments usually are those which state the offeringprice or certain underwriting data. Other substantialchanges would probably start the period running over again.In a race against time, therefore, any amendment to the8 15 U.S.C. § 77aa(25) (1947).0 15 U.S.C. § 77h (1947). By this statute the effective date (mean-ing, the date on which the security in question can be lawfully offeredfor sale) is the twentieth day after the filing of the Registration State-ment; and if any amendment to the Registration Statement is filed ona later date, the entire Registration Statement is deemed filed as ofthat date, unless the SEC consents otherwise.DUKE BAR JOURNALRegistration Statement which would substantially changethe characteristics of the security to be offered and whichwould accordingly start the twenty day waiting period run-ning anew should be filed with as little delay as possible,especially in view of the previously mentioned ninety dayperiod. Even if the change in the details of a securitywould result in an amendment to the Registration State-ment which, because of the SEC's consent to acceleration,would not start a new twenty day waiting period, still therace against time may be so close as to make the NorthCarolina statute very helpful as will be indicated. Eventhe mere avoidance of delays incident to preparing, execut-ing and filing a certificate of charter amendment may rep-resent a crucial saving of time and hence an aid to clearingan issue for sale.The North Carolina statute helps achieve the desired endby dispensing with charter amendments. 10 Moreover, bythe technique of keeping the stockholder's meeting open,and adjourning it to reconvene from time to time, the actionof the stockholders can be made to synchronize with thechanging details of the new offering. The expense of thestockholders meetings may be kept at a minimum by thesame process. When notices are sent out calling for ameeting of the stockholders, the terms can be made suffi-ciently broad so as to include any business that may arise,especially in regard to creating new securities. In this wayany action taken may be handled at the duly called meetingwithout having to call additional meetings of the stock-holders.North Carolina has not gone the full length of the fewstates which have "blank stock" provisions in their statutes.As indicated most states with such statutes give authority11 Of course, a charter amendment in the early stages of preparingfor a new issue may be necessary in order to increase the total author-ized number or amount of shares of capital stock authorized in thecharter. It is not the practice in North Carolina Corporations to carrylarge amounts of authorized but unissued capital stock for otherwisethey would incur additional fees. For the same reason, the amendmentto take care of the new issue will probably be only enough to coverthose shares."BLANK STOCK" TECHNIQUES IN N. C.to fill the "blanks" to the board of directors. 1 It has beensaid that under statutes of this nature "the position of anystockholder in such a case is, of course, precisely that ofa man who has purchased an unknown quantity. He hasno certain stake in any given capital set-up. The best thatcan be done for him is to bring to him the fact that he hasassumed the chance of what a board may subsequently doto him."'12 The North Carolina statute permits flexibilitynot present in states where a charter amendment is re-quired to change any detail as to any class of stock, but,unlike other "blank stock" statutes, it preserves corporatedemocracy.'321 See supra. note 1.2 Berle, supra. note 2, at 566.11 One minor criticism, perhaps, might be made of the North Caro-lina Statute for failing to require any public registry with referenceto the details of characteristics of stock created by stockholder's reso-lution. The effect seems of little significance. Public registry is ordi-narily not particularly significant as information; witness the fact.that under the statutes of most states there is no way of telling howmuch stock a corporation has outstanding simply by looking at thefiled papers.

“Blank Stock” Techniques in North Carolina

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“Blank Stock” Techniques in North Carolina

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