Premium Essay

Hearts 'R Us

In: Business and Management

Submitted By jenziepie
Words 1599
Pages 7
To: [Hearts ‘R Us]
From: [Poojan Bhattarai, Jennifer Paul, Johan Tong]
Date: []
Re: [Classification of preferred stock]

Executive Summary

The single most important problem faced by the company is: the classification of preferred stock.
The primary cause of this problem is:
To address this problem the company should

Situation Overview
Hearts ‘R Us (the company) is a private, medical device research and development company. The company is in the final stages of going to market with their Heart Valve System. In an effort to obtain additional financing, the company has decided to partner with Bionic Body, a publicly held SEC registrant. As part of the arrangement, the company has sold Bionic $3.5 million shares of $1 par-value Series A preferred stock. The transaction was completed on November 30, 2011. The Series A preferred stock agreement provides Bionic with the following rights: * Board Rights—Bionic is entitled to appoint one member to the company’s Board.

* Mandatory Conversion Right—at the execution of the company’s IPO with proceeds netting at least $50 million, the shares will be converted to the company’s common stock.

* Contingent Redemption Right—shares will be redeemed for par value upon the fifth anniversary of the agreement. Redemption is conditioned upon FDA approval for the company’s Heart Valve System

* Additional Protection Rights—Bionic has the right to limit future debt issuances and the right to participate in future funding.

* Right of First Refusal and co—Sale Rights

The company is a calendar year-end business and it plans to go through an IPO in the near future. Given the nature of the company’s business, there is a strong possibility that the FDA will not grant approval. Additionally, if FDA approval is not received, this will impact the contingency aspect of the stock agreement. We have

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