Chapter 24: Corporate Formation, Financing, and Termination

1. Chapter 24: Corporate Formation, Financing, and Termination

2. Learning Objectives • What steps are involved in bringing a corporation into existence? • In what circumstances might a court disregard the corporate entity (pierce the corporate veil) and hold the shareholders personally liable? • How are corporations financed? 

3. Learning Objectives • What are the steps of a merger, a consolidation, or a share exchange process? • What are the two ways in which a corporation can be voluntarily dissolved?

4. Corporate Nature and Classification • A corporation is a creature of statute, an artificial “person.” • Corporations can have one or more shareholders. • Owners can be natural persons or other businesses. • Corporation substitutes itself for shareholders.

5. Corporate Nature and Classification • Corporations are recognized as legal “persons” and enjoy virtually same rights and privileges under our Constitution as natural persons.

6. Corporate Nature and Classification • Corporate Personnel. • Responsibility for overall management of company rests with board of directors (elected by shareholders). • Board of directors makes policy decisions and hires officers to run corporation on a daily basis. 

7. Corporate Nature and Classification • Corporate Personnel. • Shareholders can sue corporation and be sued by corporation and bring suit for corporation in some instances. • Constitutional Rights of Corporations. • Recognized as a legal “person” with protections under the Bill of Rights, federal, and state statutes.

8. Corporate Nature and Classification • Limited Liability of Shareholders. • One of the key advantages of corporations is the limited liability of shareholders • In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.

9. Corporate Nature and Classification • Corporate Earnings and Taxation. • Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends. • Corporate Taxation: corporate taxes can be taxes twice, first to the corporation, then to the shareholders via dividends. 

10. Corporate Nature and Classification • Torts and Criminal Acts. • 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. 

11. Corporate Nature and Classification • Torts and Criminal Acts. • Corporation can be liable for criminal acts, but only fined. • Responsible officers may go to prison.

12. Corporate Nature and Classification • Classification of Corporations. • Domestic Corporation: does business in its state of incorporation. • Foreign Corporation: from X state doing business in Z state. • Alien Corporation: formed in another country doing business in United States.

13. Corporate Nature and Classification • Classification of Corporations. • Public and Private Corporations. • Nonprofit Corporations. 

14. Corporate Nature and Classification • Classification of Corporations. • Closely Held Corporations. • Management of Closely Held Corporations. • Transfer of Shares • Shareholder Agreement to Restrict Stock.

15. Corporate Nature and Classification • Classification of Corporations. • Closely Held Corporations. • Misappropriation of Closely Held Corporation Funds. • CASE 24.1 Rubin v. Murray (2011). How would you determine reasonable compensation?

16. Corporate Nature and Classification • Classification of Corporations. • “S” Corporations: avoids federal tax under IRS Code “Subchapter S.” • Avoids federal “double taxation” of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. 

17. Corporate Nature and Classification • Classification of Corporations. • “S” Corporations: avoids federal tax under IRS Code “Subchapter S.” • IRS requirements: Corporation is domestic, fewer than 100 shareholders, only one class of stock, no shareholder can be a non-resident alien. • Professional Corporations.

18. Corporate Formation and Powers • The process of incorporation generally involves two steps: • Promotional Activities; and  • Incorporation Procedures.

19. Corporate Formation and Powers • Promotional Activities. • Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements. 

20. Corporate Formation and Powers • Promotional Activities. • Promoter’s Liability: Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.

21. Corporate Formation and Powers • Incorporation Procedures. • Select State of Incorporation. • Secure the Corporate Name. • Must include words that disclose corporate status. • Cannot infringe on another’s trademark name. 

22. Corporate Formation and Powers • Incorporation Procedures. • Prepare the Articles of Incorporation: which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization. • File the articles with the state.

23. Corporate Formation and Powers • First Organizational Meeting. • Adopt Bylaws: • After the corporation is “chartered” (created) it can do business. • At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.

24. Corporate Formation and Powers • Improper Incorporation. • De Jure:substantial statutory requirements are met; cannot be attacked by state or 3rd parties. • De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; can only be attacked by state. 

25. Corporate Formation and Powers • Improper Incorporation. • Corporation by Estoppel: If it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

26. Corporate Formation and Powers • Corporate Powers. • Express Powers. • 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.

27. Corporate Formation and Powers • Corporate Powers. • Implied Powers. • To perform all acts reasonably necessary to accomplish its corporate purposes. • A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

28. Corporate Formation and Powers • Corporate Powers. • Ultra Vires Doctrine. • Corporate acts beyond the express or implied powers of the corporation (by statute of articles of incorporation). • Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation.

29. Corporate Formation and Powers • Piercing the Corporate Veil • In certain situations, courts will “pierce the corporate veil” and hold shareholders personally liable in the interests of justice and fairness. 

30. Corporate Formation and Powers • Factors That Lead Courts Use to Pierce the Veil. • A party is tricked into dealing with a corporation rather than the individual. • Corporation is set up never to make a profit or remain insolvent or is under capitalized. 

31. Corporate Formation and Powers • Factors That Lead Courts Use to Pierce the Veil. • Corporation is formed to evade an existing legal obligation. • Statutory formalities are not followed. • Commingling of personal and corporate interests or assets. 

32. Corporate Formation and Powers • Piercing the Corporate Veil: A Potential Problem for Closely Held Corporations. • CASE 24.2 Schultz v. General Electric Healthcare Financial Services (2010). Why was Schultz personally liable?

33. Corporate Financing

34. Corporate Financing • Stocks: Issued by business firms and government at all levels. • Normally have a maturity date – when principal is returned to investor. • Sometimes referred to as fixed-income securities, because bondholders receive fixed-dollar interest payments. • Bond indenture: lending agreement.

35. Corporate Financing • Common Stock: represents true ownership of a corporation. • Provides pro-rata (proportional) ownership interest reflected in voting, control, earnings and assets. • Investors who assume a residual financing position (whatever is left may go to dividends to shareholders). 

36. Corporate Financing • Preferred Stock: has preferences over common stock. • Cumulative Preferred. • Participating Preferred. • Convertible Preferred. • Redeemable or Callable Preferred.

37. Corporate Financing • Venture Capital: start-up businesses and high-risk enterprises need start-up and expansion capital. The start-up typically gives a share of its stock. • Private Equity Capital: obtain capital from wealthy investors. Ultimately, the company may sell shares in an IPO.

38. Merger and Acquisitions • Merger: combination of two or more corporations (A & B), after which only one company remains (A), with all of B’s rights and obligations.

39. Merger and Acquisitions • Consolidation: when two or more corporations (A & B) combine and a new corporation (C) is created, with A and B ceasing to exist.

40. Merger and Acquisitions • Share Exchange: some or all the shares of one corporation are exchanged for some or all of the shares of another corporation. • Procedures. • Board of Directors of each corporation involved must approve the merger plan. 

41. Merger and Acquisitions • Procedures (cont’d): • Majority of shareholders of each corporation must approve. • Then, documents are filed with Secretary of State who issues a certificate of merger.

42. Merger and Acquisitions • Short-Form Mergers. • For “Parent-Subsidiary” Merger. • No approval of shareholders needed. • Parent must own at least 90% of each class of stock of the subsidiary corporation. • Board of parent corporation approves and new articles filed.

43. Merger and Acquisitions • Shareholder Approval. • Merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation.

44. Merger and Acquisitions • Appraisal Rights. Shareholder has the right to be “bought out” of his/her shares. • Procedures: corporation notifies shareholders, who can demand fair market value appraisal. • Appraisal Rights and Shareholders Status: dissenting shareholder looses voting rights.

45. Mergers and Acquisitions • Purchase of Assets. • The acquiring corporation extends its ownership and control over the physical assets of another company. • Acquiring corporation shareholders do not need to approve. • Sale of Corporate Assets. • Must have approval of directors and shareholders. 

46. Mergers and Acquisitions • Purchase of Assets. • Successor Liability in Purchases of Assets. • Generally, the purchasing corporation is not automatically responsible for the liabilities of the selling company. • In the following situations, the purchasing company will be held to have assumed both the assets and liabilities of the selling company. 

47. Mergers and Acquisitions • Purchase of Assets. • Successor Liability (cont’d). Purchasing company assumes both liabilities and assets if: • Acquiring corporation impliedly or expressly assumes the liabilities. • Sale amounts to what is really a merger or consolidation. • Purchaser continues the seller’s business and retains the same personnel. 

48. Mergers and Acquisitions • Purchase of Assets. • Successor Liability (cont’d). Purchasing company assumes both liabilities and assets if: • Sale is fraudulently executed to escape liability. • CASE 24.3 American Standard, Inc. v. OakFabco, Inc. (2010). Was the purchasing company responsible for liabilities after closing?

49. Mergers and Acquisitions • Purchase of Stock and Tender Offers. • Purchase of Stock: Common alternative to merger or consolidation is the purchase of a controlling interest (up to 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target. 

50. Mergers and Acquisitions • Purchase of Stock and Tender Offers. • Tender Offers. • A publicly advertised offer addressed to all shareholders of the target is called a tender offer. • Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares • Can be in exchange for aggressor's stock. • The SEC strictly regulates tender offers.