Delaware 153b: What Is Valid Payment for Corporate Stock?
Delaware law sets clear guidelines for exchanging equity for value. Explore the principles governing stock issuance to ensure corporate compliance and integrity.
Delaware corporate law establishes specific requirements for the types of payment a corporation can accept when it issues shares of stock. This framework is designed to ensure the corporation receives genuine value for its equity. Understanding these rules helps maintain the company’s financial integrity and protect the interests of its existing shareholders. The regulations dictate what constitutes valid consideration and the formal process for its valuation and documentation.
Acceptable Payment for Corporate Stock
Delaware law is specific regarding what a corporation can receive for its shares. The most straightforward form of payment is cash. Corporations can also accept tangible property, such as machinery, real estate, or inventory, that can be used in the business’s operations. The law also permits the acceptance of intangible property, a category that includes assets like patents, trademarks, or the intellectual property in a software program.
A corporation can also issue stock in exchange for services that have already been rendered to the company or for any other benefit to the corporation, which may include contracts for future services. For instance, if a consultant provided strategic planning services before the stock issuance, the value of that completed work can be used as payment for shares. This provides a mechanism to compensate founders and other contributors who invest their labor.
The Board’s Responsibility in Valuation
The responsibility for determining the value of any non-cash payment for stock rests exclusively with the corporation’s board of directors. When stock is issued for property or services, the board must formally assess the worth of that consideration. This valuation is an exercise of the board’s business judgment, and Delaware law grants significant deference to their decisions.
In the absence of actual fraud in the transaction, the board’s determination of the value is considered conclusive. This legal standard provides boards with protection to make business judgments without fear of shareholder lawsuits second-guessing their valuation of complex assets. As long as the board acts with due care and loyalty to the corporation, its valuation of the consideration received for stock will be upheld.
Required Corporate Recordkeeping
Properly documenting the issuance of stock is a matter of corporate formality. The entire transaction must be authorized and recorded through a formal resolution adopted by the board of directors. This internal document serves as the official record of the decision and is a piece of the corporation’s books and records, subject to review during audits or financing rounds.
The board resolution must contain specific details. It needs to identify the stock being issued, including the number of shares and the class or series. The resolution must also provide a description of the consideration the corporation is receiving, such as a cash amount, a list of tangible assets, or a description of services performed.
A component of the resolution is the board’s formal statement on the value of the consideration. The document must explicitly state the value, in dollars, that the board has assigned to the non-cash payment. This declaration memorializes the board’s valuation decision.