Corporations

1. Corporations Chapter 20

2. Basics of Corporations • A corporation is a creature of statute, an artificial “person.” • Most states follow the Model Business Corporation Act (MBCA) or the RMBCA, that are model corporation laws. • The shares (stock) of a corporation are owned by at least one shareholder (stockholder).

3. Constitutional Rights of Corporations • A corporation is an artificial “person” and has constitutional rights to: • Equal protection; • Access to the courts, can sue and be sued; • Right to due process before denial of life, liberty, or property.

4. Constitutional Rights of Corporations • Corporation’s rights (cont’d): • Freedom from unreasonable search and seizure and double jeopardy. • Freedom of speech.

5. Limited Liability of Shareholders • The corporation provides limited liability for stockholders. • In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.

6. Corporate Taxation • Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends. • Corporate profits are taxed under federal and state law as a separate “person” from its shareholders. • Profits from a regular “C” corporations are taxed twice: at the corporate level and at the shareholder level.

7. Torts and Criminal Acts • A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. • Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

8. Corporate Powers • A corporation may act and enter into contracts as any natural person, except as limited by: • U.S. Constitution. • State constitutions. • State statutes. • Its own articles of incorporation. • Its own corporate bylaws. • Resolutions by its own board.

9. Express Corporate Powers • The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. • Corporate by-laws may also grant or limit a corporation’s express powers.

10. Implied Powers • Corporation has implied powers to: to perform all acts reasonably necessary to accomplish its corporate purposes, e.g.,: • Borrow and lend money. • Extend credit. • Make charitable contributions. • A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

11. Classification Of Corporations • Domestic corporation does business in its state of incorporation. • Foreign corporation from one state doing business in another state. • Alien Corporation: formed in another country doing business in United States.

12. Corporation Formation • The process of incorporation generally involves two steps: • Preliminary and Promotional Activities; and • The Legal Process of Incorporation.

13. Promoter’s Liabilities • Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable. • After corporate formation, corporation can adopt the pre-incorporation contract and release the promoter by creating a “novation”.

14. Forming A Corporation (Legal Process) • State Chartering: Select state (some states such as Delaware cater to corporations). • Articles of Incorporation: primary enabling document filed with the Secretary of State that includes basic information about the corporation. Person(s) who execute the articles are the incorporators.

15. Forming A Corporation (Legal Process) • Choose and reserve a Corporate Name. • Name must have the proper suffix: “Corporation,” “Incorporated,” “Company ” or “Limited” or an abbreviation of one of these.

16. Forming A Corporation (Legal Process) • Internal organization and rules governing the corporation: usually included in the bylaws. • Registered Office and Agent: specific person that will receive any legal notice and documents from state and/or 3rd parties.

17. First Organizational Meeting • After the corporation is “chartered” (created) a Certificate of Incorporation is issued by the state and it can do business • Shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities.

18. Corporate Financing • Bond - A debt security that represents borrowing by the corporation, in accordance with a bond indenture—a contract between the issuing corporation and the bondholder. - Priority right to return of capital - Fixed or variable interest rate

19. Corporate Financing • Common Stock • Shareholder has a proportionate interest in the corporate with regard to voting, earnings, and net assets. • Last to Receive Dividends or Surplus on Dissolution

20. Corporate Financing • Preferred Stock • Shares with priority over common stock for payment of dividends and distribution of assets on dissolution. • May pay fixed dividend • May not have voting rights

21. Bonds v. Stocks

22. Board of Directors • Every corporation is governed by a board of directors. • Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation. • A director can also be a shareholder, especially in closely-held corporations.

23. Duties of Directors • Attend Board Meetings • Adopt Policies • Authorize Major Actions • Supervise Officers & Management • Approve Dividends

24. Role of Corporate Officers • Officers serve at the pleasure of the Board of Directors (and are elected by them) but have fiduciary duties to company as well. • Run day-to-day operations of the corp. • Their employment relationships are generally governed by contract law and employment law. • Officers may be terminated for cause.

25. Duties and Liabilities of Directors and Officers • Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders: -Duty of Care, and -Duty of Loyalty Failure to follow these duties may subject the officers and directors to personal liability

26. Duty of Care • Directors/officers are expected to act in good faith and the best interests of the corporation. • Make informed and reasonable decisions; • Rely on competent consultants and experts; and • Exercise reasonable supervision.

27. Duty of Care • Directors and officers may be liable for negligent acts that breach the standard of due care: • Crimes and torts committed by them individually and/or those committed by employees under their supervision. • Shareholder derivative suits where shareholder(s) sue directors on behalf of corporation.

28. Duty of Care • A dissenting director is rarely held liable for mismanagement of corporation. Dissent must be registered with the corporate secretary and posted in the minutes of the meetings.

29. Duty of Loyalty • Loyalty to corporation & shareholders instead of personal interest • Cannot compete with corporation • Cannot usurp corporate opportunities • No conflicts of interest

30. Conflicts of Interest • Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally. • However, if transaction was fair and reasonable, it will not be voidable if approved by majority of disinterested directors.

31. Business Judgment Rule • Immunizes a director or officer from liability from consequences of a business decision that turned sour. • Court will not require directors or officers to manage “in hindsight.” • As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.

32. Shareholders • Ownership of shares grants a shareholder an equitable ownership interest in a corporation. • Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors. • Shareholders are generally protected from personally liability by the corporate veil of limited liability.

33. Shareholder Liability • If the corporation fails, shareholders generally cannot lose more than their investment. • Shareholders are generally not liable for the contracts or torts of the corporation. However the corporate veil may be pierced under: -“Alter ego theory” or - “Undercapitalization theory”

34. Shareholder Powers • Shareholder powers include approving all fundamental changes to the corporation: • Amending articles of incorporation or bylaws. • Approval of mergers or acquisition. • Sale of all corporate assets or dissolution. • Shareholders also elect and remove the board of directors.

35. Shareholders Meetings • Shareholders’ meetings must occur at least annually. Voting requirements and procedures are: • Quorum of shareholders owning more than 50% of shares must be present to conduct business; • Shareholders may appoint a proxy. • Common shareholder entitled to one vote per share (bylaws may prescribe ways to help minority shareholders elect Directors).

36. Shareholders Meetings • For special shareholder meetings: • Notice and time of meetings must be sent in writing to each shareholder within a reasonable time ahead of the meeting. • Notice must state reason for meeting and only deal with this matter.

37. Shareholders Rights • Conduct Shareholders Meetings • Vote in Person or by Proxy • Vote by Number of Shares Owned • Inspection of Books & Records • Right to Transfer Shares (unless restricted by agreement) • Right to buy newly issued stock (Preemptive Rights) • Dividends and Rights on Dissolution

38. Preemptive Rights • Common law concept which is a preference to existing shareholders to purchase a pro-rated share of newly-issued stock within a certain period of time. • Provided for in the articles of incorporation. • Significant in a close corporation to prevent dilution and loss of control.

39. Dividends • Distribution of corporate profits or income. • Only as ordered by the Board (Shareholder approval is not needed). • Can be stock, cash, property, stock of other corporations.

40. Failure by Directors to Declare Dividend • When directors fail to declare a dividend, shareholders can sue. • Directors do not have to declare if they have a rational basis for withholding a dividend (a bona fide purpose). • Often, profits are retained for expansion, research or upgrades.

41. Mergers and Consolidations • Merger - combination of two or more corporations with one corporation surviving • A + B = A • Successor assumes all liabilities and obligations of prior corporations

42. Mergers and Consolidations • Consolidation - combination of two or more corporations with new corporation created • A + B = C • Successor assumes all liabilities and obligations of prior corporations

43. Purchase of Assets or Stock • Purchase of Assets - one corporation buys assets of another corporation • No assumption of liabilities by purchaser (unless really a continuation of previous company or a fraud to avoid liability) • Selling corporation continues to exist

44. Purchase of Assets or Stock • Purchase of Stock - one corporation or party buys stock of another corporation (tender offer) • Control of all assets goes with stock • Liabilities remain in corporation • Corporation may be held as subsidiary or merged into acquiring corporation

45. Termination • Termination of a corporation consists of two phases: • Dissolution (voluntary or involuntary legal “death” of the corporation); and • Liquidation (assets converted to cash and distributed to creditors and shareholders).

46. Corporations End of Chapter 20