Equity Characteristics

Everything on owning stock, on one sheet: rights, resale rules, dividends, and the two employee stock options the exam loves to compare.

The One-Liners That Win Points

• Cumulative voting protects minority shareholders; it multiplies shares by open board seats so you can stack every vote on one candidate. Statutory (straight) voting favors the majority.
• Preemptive (antidilution) rights let existing holders buy new shares first, protecting both voting power AND ownership percentage; they must be written into the corporate charter.
• Common stockholders are paid last in liquidation and may get nothing: secured creditors, then unsecured creditors, then bondholders, then preferred, then common.
• Restricted securities come from unregistered deals (private placements, compensation); control securities are held by affiliates (officers, directors, or 10%-plus owners), however acquired.
• Stock dividends are not taxable when received; cash dividends are.
• The ex-dividend date is set by the exchange, not the company or the board.
• Incentive Stock Options (ISOs) go only to employees; Non-Qualified Stock Options (NQSOs) can go to anyone the company designates.

Numbers to Lock In

Top Gotchas

• Volume limit is the GREATER of 1% of outstanding or average weekly volume, not the lesser.
• Affiliates never escape volume limits and filing requirements, even after the holding period; non-affiliates of reporting companies sell freely once the period is met.
• The restricted-stock resale rule has a holding period; the QIB resale safe harbor does not.
• The 5,000-share / $50,000 figure is the Form 144 filing trigger, not the sales ceiling; the ceiling is the volume formula.
• ISOs have no regular income tax at exercise, but the spread IS an Alternative Minimum Tax (AMT) preference item. Read whether the question asks about regular tax or AMT.
• The employer gets a tax deduction for NQSOs, not for ISOs.
• Stock dividends adjust cost basis per share but not total cost basis; your total investment value stays the same.

Shareholder Rights

• One vote per share on directors, mergers and acquisitions, charter amendments, and stock splits.
• Cumulative voting = shares times open seats, concentrate on one candidate (minority-friendly). Statutory (straight) voting = spread votes evenly (majority sweeps).
• Preemptive rights keep your proportional ownership; notice plus a defined window (often 10 to 30 days) to exercise. Not automatic; charter must grant them.
• Liquidation order: secured creditors, unsecured creditors, bondholders, preferred stock, common stock last.

Restricted Stock and Resale Restrictions

• Restricted stock is unregistered (Regulation D private placements, compensation plans), so it cannot trade freely until holding periods and conditions are met.
• Holding period begins when the securities are fully paid for: 6 months for a reporting issuer (files periodic reports), 12 months for a non-reporting issuer.
• After the period, non-affiliates of reporting companies sell freely with no volume limits or filings; affiliates stay bound by volume limits and Form 144.
• QIB resale safe harbor: resell restricted securities to Qualified Institutional Buyers with no holding period, no volume limits, and no SEC filing; QIB owns and invests at least $100 million ($10 million for broker-dealers). Securities cannot be of the same class as any listed on a national exchange.

Dividends

• Declared by the board of directors; never guaranteed; a return of corporate profits.
• Cash dividends are taxable (qualified dividends get 0%, 15%, or 20% if the more-than-60-days-in-the-121-day-window test is met); stock dividends are not taxable on receipt and only spread the same total cost basis across more shares.
• Four dates: Declaration (board announces), Ex-dividend (exchange sets; first day a buyer does NOT get the dividend), Record (holders on record qualify), Payment (paid out). Under T+1 settlement the ex-date is the same day as the record date when that date is a business day.
• Buy before the ex-date to receive the dividend; the price typically drops by the dividend amount on the ex-date.

Employee Stock Options

• ISOs (employees only): no tax at grant or exercise for regular tax; qualifying sale is all long-term capital gain; the exercise spread is an AMT preference item; no employer deduction.
• ISO holding requirement: 2 years from grant AND 1 year from exercise. Miss either and it is a disqualifying disposition (spread taxed as ordinary income).
• NQSOs (anyone the company designates): no tax at grant; the spread (market price minus exercise price) is ordinary income at exercise; later appreciation is capital gain; no AMT; employer deducts the ordinary income.

Memory Aid: DERP for Dividend Dates and 2-1 for ISOs

• DERP: Declaration, Ex-dividend, Record, Payment. The board Declares, the Exchange sets the ex-date, Record determines eligibility, then Payment goes out. Only the ex-date is set by the exchange.
• 2-1: ISO holding periods, 2 years from grant and 1 year from exercise. The longer wait runs from the earlier event.

One-Breath Recap

Common shareholders vote (cumulative voting stacks shares times open seats to protect the minority; straight voting favors the majority), hold charter-granted preemptive rights against dilution, and stand last in liquidation behind creditors, bondholders, and preferred. Restricted and control stock cannot trade freely: the resale rule sets a 6-month holding period for reporting issuers and 12 months for non-reporting, affiliates keep volume limits (greater of 1% outstanding or average weekly volume) and Form 144, while the QIB safe harbor waives all of that for $100 million institutions. Dividends run Declaration, Ex-dividend, Record, and Payment, with the exchange setting the ex-date, stock dividends untaxed on receipt, and price dropping by the dividend amount. ISOs go only to employees with no regular tax at exercise but an AMT-preference spread and a 2-years-from-grant, 1-year-from-exercise hold, while NQSOs go to anyone, tax the spread as ordinary income at exercise, and earn the employer a deduction.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Equity Characteristics unit for the complete lesson.