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Instructions:
Assignment on Rose Marketing Case Study
Rose Marketing Inc. (Rose or the “Corporation”) is a privately held company that specializes in immersive marketing for locally sold products and handcrafted items. In exchange for $100 million, Rose engaged into a series of agreements with InVest Co. (InVest), to whom shares of preferred stock (the “Preferred Stock” or the “Shares”) and warrants were granted.
Issuance of Preferred Stock
$0.01 per share is the par value.
There are a total of 250,000 shares available.
Liquidation In the event of the Company’s voluntary or involuntary liquidation, dissolution, or winding up (a “Liquidation Event”), or any “Deemed Liquidation Event” (defined below), the shareholders of each series of Preferred Stock then outstanding should be entitled to payment out of the funds and assented to before any payment to the shareholders of Rose common stock (“Common Stock”) is made.
Unless the holders of at least a majority of the outstanding shares of Preferred Stock prefer otherwise, a Deemed Liquidation Event comprises any of the following events:
A merger or consolidation, with the exception of one in which the Company’s stockholders retain at least a majority of voting power following the transaction (a “Merger or Consolidation”).
The sale, lease, transfer, or other disposal of all or substantially all of the Company’s assets in a single transaction or a series of connected transactions by the Company.
The cash or the value of the property, rights, or securities paid or distributed to such holders by the Company or the acquiring person, firm, or other entity should be deemed paid or distributed to the holders of the Company’s capital stock upon any such merger, consolidation, sale, transfer, exclusive license, or other disposition. Before a Deemed Liquidation Event to take place, the Company’s board of directors must agree.
Rose Marketing Inc., Case 3c, Page 2
All Rights Reserved by 2020 Deloitte Development LLC.
Conversion option Each share of Preferred Stock should be convertible into one fully paid and nonassessable share of Common Stock at any time, at the holder’s option, and without the payment of extra consideration (the “Conversion Rights”).
Termination of conversion rights In the event of a Liquidation Event or a Deemed Liquidation Event, the Conversion Rights should expire at the close of business on the last full day preceding the date set for the payment of any amounts distributable to holders of Preferred Stock as a result of such event.
Mandatory conversion Each share of Preferred Stock should be mandatorily converted on the date and time specified by vote or written consent of the holders of a majority of the then-outstanding shares of Preferred Stock, in which case (1) all outstanding shares of Preferred Stock should automatically be converted into shares of Common Stock, for no additional consideration, and (2) such shares of Common Stock should be automatically converted into shares of Common Stock, for no additional consideration.
Voting rights Preferred Stock holders have the right to vote as a single class with common stockholders on an as-converted basis on any item brought before the Company’s stockholders for action or discussion at any stockholders meeting. Holders of Preferred Stock should be able to elect four directors of the Company as a separate class, whereas holders of common shares should be able to elect one director of the Company as a separate class. As a result, the Preferred Stock holders have complete authority over Rose’s voting power and board of directors.
The Agreement on Warrants
Rose and InVest entered into a warrant agreement (the “Warrant Agreement”) in conjunction with the issuance of the Preferred Stock, giving InVest the opportunity to purchase shares of the Preferred Stock (the “Warrants”). The Warrants will be redeemable for 300,000 shares of Preferred Stock at first.
$0.01 per share exercise price
Term The Warrants may be exercised at any time during or after their issuance, and they will expire 10 years later or when a Deemed Liquidation Event occurs.
Payment must be made in cash.
Right to transfer The Warrants can only be transferred with the Company’s prior written authorization, which should not be withheld unreasonably.
No stockholder rights Prior to exercise, holders of the Warrants have no voting rights, dividend rights, or any other rights that Preferred Stock or Common Stock holders have.
Rose Marketing Inc., Case 3c, Page 3
All Rights Reserved by 2020 Deloitte Development LLC.
Unit of account If the Warrants are exercised, the Preferred Stock will not be extinguished.
While the Company is not currently an SEC registrant, it is considering registering its shares of Common Stock, and as a result, the Company uses the SEC and SEC staff guidance codified in ASC 480-10-S99 of ASC 480, Distinguishing Liabilities From Equity (ASC 480) to determine whether the Preferred Stock should be classified outside of permanent equity.
Required:
1. According to ASC 480, how should Rose classify the Preferred Stock?
2. Determine if the Warrants satisfy the ASC 480 definition of a freestanding financial instrument.
3. According to ASC 480, how should Rose classify the Warrants?
Rose Marketing Inc., Case 20-1, is required to complete the following tasks:
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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Assignment on Rose Marketing Case Study