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.
What Are the Shareholder Rights, at a Glance?
| Right | Common Stock | Preferred Stock |
|---|---|---|
| Voting | Yes (statutory or cumulative) | Generally no (contingent if dividends in arrears) |
| Preemptive | Where charter grants it (maintain ownership %) | No |
| Liquidation | Last (residual claim) | 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?
| Key Rule | Reporting Company | Non-Reporting Company |
|---|---|---|
| Holding period | 6 months | 12 months (1 year) |
- Restricted stock: restricted because of what it is (unregistered)
- Control stock: restricted because of who holds it (affiliate)
- 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 required for affiliates if sales exceed 5,000 shares or $50,000 in a 3-month period
What Are the Dividend Mechanics, at a Glance?
| Dividend Type | Tax at Receipt | Effect on Value |
|---|---|---|
| Cash (qualified) | Long-term capital gains rates | Reduces company cash |
| Cash (ordinary) | Ordinary income rates | Reduces company cash |
| Stock dividend | Not taxed | No change (more shares, lower price) |
| Property dividend | Taxable at fair market value (FMV) | 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?
| Feature | ISO (Incentive Stock Options) | NQSO (Nonqualified Stock Options) |
|---|---|---|
| Who receives | Employees only | Anyone (employees, contractors, directors) |
| Tax at exercise | No regular tax (alternative minimum tax (AMT) possible) | Ordinary income on the spread |
| Tax at sale | Long-term capital gains (if held) | Capital gains on post-exercise appreciation |
| Exercise price | Must be at least FMV at grant | Any price |
| Company deduction | None (qualifying disposition only; a disqualifying disposition gives a deduction) | 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... | Topic |
|---|---|
| Voting, proxy, cumulative, minority shareholder, preemptive rights | Shareholder rights |
| Resale rule, affiliate, holding period, unregistered shares, Form 144 | Restricted stock |
| Ex-date, record date, arrearages, cumulative preferred, qualified dividend | Dividends |
| ISO, NQSO, exercise price, AMT, vesting, disqualifying disposition | 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: restricted-stock holding periods (6 or 12 months) are separate from 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, file Form 4 within 2 business days) before applying a dollar or percentage threshold.