Also known as:adequate consideration tests · adequacy of consideration
Written by attorneys · grounded in primary & secondary sources — see below
A board determination that property or benefits received in exchange for shares meet the statutory standard of adequacy. The determination conclusively establishes that the shares are validly issued, fully paid, and nonassessable once the corporation receives the authorized consideration.
Sources & Authorities
How it applies
Common Examples
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Influencer Services and Subscriber List
River Shop's board authorized 20,000 shares to Howard in exchange for past promotional posts that increased sales, a three-year exclusive marketing contract, and transfer of his brand name plus a 150,000-subscriber list. The board formally determined the package constituted adequate consideration and issued the shares. Hope, a cash-paying shareholder, sued to declare the shares not fully paid. The board determination prevents any challenge to adequacy and renders the shares validly issued, fully paid, and nonassessable.
Partially Completed Software and Note
Bright Labs' board authorized 50,000 shares to Trent for 40 percent completed custom software, a six-month maintenance contract, and an unsecured $75,000 promissory note. The board passed a resolution finding the aggregate package adequate and directed issuance. Harrison, the majority shareholder, sought to enjoin the transaction on grounds that future elements were too speculative. The board's adequacy determination controls and permits the issuance to proceed.
Put it into practice
Test Yourself
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Practice Questions5
· 1 primary source
Select any source to read its text and confirm it supports the definition.
Model Codes
Study Supplements
Common questions
Frequently Asked
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Does the board's determination of adequate consideration prevent later challenges to share validity?+
Yes. The statute makes the board's determination conclusive on whether shares are validly issued, fully paid, and nonassessable. Once the corporation receives the authorized consideration, the shares attain that status without further judicial review of value.
Supporting sources
Can a corporation issue shares for future services or an unsecured promissory note?+
Yes. Permissible consideration includes contracts for services to be performed and promissory notes. The board may determine such forms adequate, and the shares become fully paid and nonassessable upon receipt of the consideration or use of escrow arrangements.
Supporting sources
Must the board's adequacy determination be formal or recorded in writing?+
No. Informal discussion among directors that reaches a conclusion on adequacy before issuance satisfies the requirement. The statute does not impose a writing or resolution mandate.
Supporting sources
Does an articles provision reserving issuance power to shareholders override a board determination?+
Yes. The statute expressly allows articles to reserve the power to shareholders. When the articles do so, the board lacks authority and any issuance is invalid regardless of an adequacy determination.
Supporting sources
Business Associations Corporations and LlcsFinancing the organization · Sources of financeUBEIntermediate