Synthesis

Quick Answer

This unit covered shareholder rights, restricted-stock resale rules, dividend mechanics, and employee stock options. Each has its own trigger words on the exam: voting and liquidation for shareholder rights, affiliate and holding period for restricted stock, ex-date and arrearages for dividends, and ISO/NQSO for stock options.

Use the tables below as a fast cross-reference once you already know each topic individually; they group the unit's four areas side by side rather than teaching them from scratch.

Voting: Common Stock Yes (statutory or cumulative); Preferred Stock Generally no (contingent if dividends in arrears)

Preemptive: Common Stock Where charter grants it (maintain ownership %); Preferred Stock No

Liquidation: Common Stock Last (residual claim); Preferred Stock Before common, after all debt

Cumulative voting favors minority shareholders by letting them concentrate all votes on fewer candidates

Liquidation priority: secured creditors > unsecured creditors > subordinated debentures > preferred > common

Both common and preferred stockholders have limited liability: can lose only the amount invested

What Are the Restricted-Stock Resale Rules, at a Glance?

Restricted stock: restricted because of what it is (unregistered)

Control stock: subject to resale conditions because of who holds it (affiliate), with no holding period unless the shares are also restricted

Restricted stock carries a holding period before resale; a reporting company's shares can be resold after 6 months, a non-reporting company's after 1 year

Affiliates always face restrictions (volume limits, Form 144, manner of sale), even for open-market shares

Non-affiliates who satisfy the holding period can sell freely with no volume limits or filings

Form 144 is required for affiliates whose sales exceed certain thresholds

What Are the Dividend Mechanics, at a Glance?

Cash (qualified): Tax at Receipt Long-term capital gains rates; Effect on Value Reduces company cash

Cash (non-qualified): Tax at Receipt Ordinary income rates; Effect on Value Reduces company cash

Stock dividend: Tax at Receipt Generally not taxed; Effect on Value No change (more shares, lower price)

Property dividend: Tax at Receipt Taxable at fair market value (FMV); Effect on Value Reduces company assets

Dividends are not guaranteed; declared solely by the board of directors (shareholders do NOT vote on dividends)

Must buy before ex-date to receive dividend

Ex-date = record date under T+1 settlement

Cumulative preferred arrearages must be paid in full before common stockholders receive any dividend

What Are the Employee Stock Option Rules, at a Glance?

Who receives: ISO (Incentive Stock Options) Employees only; NQSO (Nonqualified Stock Options) Anyone (employees, contractors, directors)

Tax at exercise: ISO No regular tax (alternative minimum tax (AMT) possible); NQSO Ordinary income on the spread

Tax at sale: ISO Long-term capital gains (if held); NQSO Capital gains on post-exercise appreciation

Exercise price: ISO Must be at least FMV at grant; NQSO Any price

Company deduction: ISO None (qualifying disposition only; a disqualifying disposition gives a deduction); NQSO Yes (equals employee's ordinary income)

ISO holding requirements: 2 years from grant AND 1 year from exercise

ISO annual limit: $100,000 FMV vesting per year

ISO exercise price must be at least FMV at grant; NQSO exercise price can be any price

AMT (alternative minimum tax) may apply at ISO exercise even though no regular income tax is owed

How Do You Sort a Question Into the Right Topic?

When you see an equity characteristics question on the exam, identify which topic applies:

If the question mentions Voting, proxy, cumulative, minority shareholder, preemptive rights, Topic Shareholder rights

If the question mentions Resale rule, affiliate, holding period, unregistered shares, Form 144, Topic Restricted stock

If the question mentions Ex-date, record date, arrearages, cumulative preferred, qualified dividend, Topic Dividends

If the question mentions ISO, NQSO, exercise price, AMT, vesting, disqualifying disposition, Topic Employee stock options

What Should You Check on Exam Day?

Use the trigger-word table above first; it routes you to the right rule set before you start reasoning.

Do not mix up the two holding-period pairs: the restricted-stock holding period is separate from the ISO holding periods (2 years from grant, 1 year from exercise).

Keep the "who votes / who doesn't" and "who is paid first / last" answers distinct; preferred stock is a partial exception to both.

Confirm eligibility (employee-only for ISOs) and timing (buy before the ex-date) before applying a dollar or percentage threshold.