Business Law 2: Exam 2: Corporation

Function of the Board of Directors: 1. Board of Directors 2. Chairman of the Board

1. Board of directors make business decisions that are carried out by the officers 2. Chairman of the board: the head of all directors

Classes of Shares: 1. Common Stock 2. Preferred Stock

1. Common Stock: stock not having any special contract rights. 2. Preferred Stock: stock having contractual rights superior to those of common stock Dividend Preference: must receive full dividend before any dividend may be paid on Common Stock. Liquidation Preference: when corporation is dissolved Preferred stock gets their money back before common stock.

Chapter 34: Nature, Formation, and Powers

1. Corporate Attributes 2. Classification of Corporation 3. Formation of a Corporation 4. Piercing the Corporate Veil

Debt Securities: 1. Debt Security 2. Bond 3. Rule

1. Debt Security: source of capital creating no ownership interest and involving the corporation's promise to repay funds lent to it. -raise capital by selling bonds and shares 2. Bond is an example of debt security, CD- certificate of deposit, promissory note, mortgage note 3. Rule: each corporation has the power to issue debt securities as determined by the board of directors

Charter Amendments: 1. Definition 2. Procedure

1. Definition: changing the articles of incorporation charter: articles of incorporation amendments: change 2. Procedure: the B.O.D. adopts a resolution that must be approved by majority vote of the shareholders B.O.D.: business decisions 2. Meetings: 1. B.O.D. needs to change something 2. shareholders; vote

Combinations: 1. Merger

1. Definition: the combination of the assets of 2 or more corporations to form a new corporation. A + B = C acquire: assets and liabilities ex: Benz and Chrysler 2. Procedure: requires approval by directors and shareholders of each corporation 4 meetings: US: 1. B.O.D. 2. Shareholders Germ: 3. B.O.D. 4. Shareholders

Combinations: 2. Acquisition

1. Definition: when 1 corporation buys another. A+B=B -only 1 survives ex: Chase bought Washington Mutual Wells Fargo bought Wachovia 2. Procedure: requires approval of he B.O.D. and shareholders of each corporation -If you are a shareholder at corporation B, you become a shareholder at Corporation A. Corporation B: B.O.D. and officers lose their jobs or there can be Co CEO (often doesn't work)

Issuance of Shares: 1. Equity Security 2. Share 3. Treasury Stock

1. Equity Security: source of capital creating an ownership interest in corporation 2. Share: a proportionate ownership interest in a corporation 3. Treasury Stock: shares reacquired by a corporation Treasury: buying its own stock back - having to pay dividends can be expensive

Role of Shareholders: 1. General Rule 2. Shareholder Meeting

1. General Rule: shareholders are not directly involved in the management of a large corporation. They are indirectly because they vote to elect the directors. ex: you have no say when the IPhone 6s comes out -they elect who are directly involved. - number of shares is equal to the number of votes 2. Shareholder Meeting: shareholder may exercise their voting rights at both annual and special shareholder meeting special: emergency: CEO dies ordinary: by law corporation must have 1 meeting per year

Role of Officers: CEO, CFO, CMO, CTO, COO

1. Officers are agents of the corporation 2. Officers put into action decisions made by B.O.D. 3. CEO: the head of all officers CFO: in charge of financial affairs CMO: in charge of marketing CTO: in charge of human resources COO: in charge of logistics and operations in a small corporation: president, VP, etc.

Types of Dividends and other Distributions: 1. Stock Split 2. Liquidating Dividend

1. Split stock: each of the outstanding shares is broken into greater number of shares - supply goes up; prices go down -reduces value of your shares to prevent millionaires from taking over. -B.O.D. makes decision of how many stocks they are giving -2 reasons: 1. reduce the value of stock; 2. Pay dividend between B.O.D. and shareholders 2. Liquidation Dividend: distribution of capital assets to shareholders (when corp dissolves) 1. Preferred, then common; you can lose your investment

Dissolution: 1. Voluntary Dissolution

1. Voluntary Dissolution: may be brought about by a resolution of the B.O.D. that is approved by the shareholders.

Function of the Board of Directors: 10. Delegation of Board Powers 11. Directors' Inspection Rights

10. Delegation of Board Powers: committees may be appointed to perform some but not all of the board's function 11. Directors' Inspection Rights: directors have the right to inspect corporate book and records

Function of the Board of Directors: 12. Duty of Obedience 13. Duty of Diligence 14. Duty of Loyalty

12. Duty of Obedience: must exercise withing respective authority 13. Duty of Diligence: must exercise ordinary care and prudence 14. Duty of Loyalty: each director is forbidden from sitting on a board from a corporation that is in competition with his present corporation

Function of the Board of Directors: 15. Business Judgmental Rule

15. Business Judgmental Rule: the B.O.D. cannot be sued if their business decisions causes the corporation to lose money if they act with due care, in good faith, and in a manner reasonably believed to be in the best interests of the corporation

Function of the Board of Directors: 3. Capital Structure 4. Fundamental Changes 5. Dividends

3. Capital Structure: the B.O.D. decides how the corporation will raise capital and by how much (debt and equity) 4. Fundamental changes: the directors have the power to make, amend, or repeal the bylaws amend: change; repeal: cancel 5. Dividends: directors declare the amount and type of dividend cash, property, stock split

Role of Shareholders: 3. Quorum 4. Election of Directors

3. Quorum: minimum number of shareholders necessary to be present at a meeting in order to transact business - your bylaws will say thee minimum number - number of shareholders does not equal number of votes 4. Election of Directors: the shareholders elect the board at the annual meeting of the corporation B.O.D. can invite a person to sit as director : brain, money, and connections

Issuance of Shares: 4. Authority to Issue 5. Preemptive Rights

4. Authority to Issue: only those shares authorized in the articles of incorporation may be issued. 5. Preemptive Rights: It is the right of a shareholder to buy a specific number of shares at a specific price so that his percentage of ownership not reduced when corporation sells more shares.

Role of Shareholders: 5. Removal of Directors 6. Approval of Fundamental Changes

5. Removal of Directors: the shareholders may by majority vote remove director with or without cause 6. Approval of Fundamental Changes: shareholder approval is required for charter amendments, most acquisitions, and dissolution charter: articles of incorporation "Do shareholders manage a company?" They are indirectly involved, they chose B.O.D. but have the 3 exceptions.

Function of the Board of Directors: 6. Management Compensation 7. Vacancies in the Board

6. Management Compensation: The B.O.D. determines the salaries of the B.O.D. and the officers expertise and connection 7. Vacancies in the board: may be filled by the vote of a majority of the remaining directors drop dead and will nominate someone

Role of Shareholders: 7. Proxy 8. Right to inspect books and records

7. Proxy: authorization to vote another's shares at a shareholder meeting hire: lawyer, accountant, financial adviser; family or corporation itself 8. Right to inspect books and records: if the demand is made in good faith and for a proper purpose request balance sheet and income statement shareholders: its proper to want to know how the corporation is doing

Function of the Board of Directors: 8. Meeting 9. Action without taking a meeting

8. Meeting: directors have the power to bind the corporation only when acting as a board (in order for a board decision to be valid all members must be present) -Teleconferences and video conferences are allowed. 9. Action without taking a meeting: permitted if a consent in writing is signed by all of the directors

Corporate Attributes: Legal Entity

A corporation is an entity apart from its shareholders, with entirely distinct rights and liabilities. -owners of a corporation are called "shareholders" - "guarantee" of loans when loans are taken out in the name of the corporation (guarantor)

Corporation Attributes: Creature of the State

A corporation may be formed only by substantial compliance with a state incorporation statute. creature: controlled by the state compliance: obey statute: law - you can form a corp. in another state but you have to ask for permission to sell in another state.

Types of Dividends and other Distributions: 3. Redemption of Shares

A corporation's exercise of the right to purchase its own shares. redemption: they have been redeemed (treasury stock) Preferred stock and common stock: it all depends on where the common stock is coming from if it from a stable company why would you get a preferred stock.

Corporate Attributes: Limited Liability

A shareholder's liability is limited to the amount invested in the business enterprise. -Reasons to form a corporation: not wanting to buy things in your name & limited liability

Formalities of Incorporation: 5. Articles of Incorporation 6. Organizational Meeting

Articles of Incorporation: documents of a corporation - when forming a corporation it is called the articles of incorporation Organizational meeting: the first meeting, held to adopt the bylaws and appoint officers

Classification of Corporations: Professional Corporation

Corporate form under which duly licensed individuals may practice their profession. ex: lawyers, accountants, engineers etc. exempt from certain taxations

Role of Shareholders: 9. Shareholder Suits

Direct Suits: the shareholder sues the corporation on his own behalf in order to enforce his rights Derivative Suit: the shareholder sues the directors, officers, or any 3rd party on behalf of the corporation -when the shareholder is not being affected directly ex: check the income statement and they have expenses for entertainment - you don't get a cut, winning money goes back to the corporation. Amount of shares doesn't matter and you can do it on your own.

Classification of Corporations: C- Corporation

Formed under the statute of any state. Subject to double taxation ex: corp makes $100,000 and gets taxed 20% the $80,000 that are left is the owners income and that gets taxed once again

Types of Dividends and other Distributions: 5. Directors 6. Shareholders

Directors: the directors who agree to an improper dividend are liable for the unlawful amount of the dividend. directors are shareholders; they declare to "some"; this some is themselves -get sued: they have to give the money back to the corporation Shareholders: a shareholder must return illegal dividend if he knew if illegality, f the dividend resulted from his fraud or if the corporation is insolvent - you can't be sued if you get the money and didn't know

Classification of Corporations: Domestic vs. Foreign Corporations

Domestic Corporation: one created under the laws of a given state. Foreign Corporation: doing business in a state in which it was not formed.

Corporate Attributes: Free Transferability of Corporate shares Perpetual Existence

Free transferability of corporate shares: shareholders are free to transfer their shares by gift or sale Perpetual existence: it outlive its owners ex: Apple: Steve Jobs, Disney: Walt Disney; they both died but the companies kept going

Piercing the Corporate Veil

General Rule: the courts may disregard the corporate entity when it is used to defeat public convenience, commit a wrong doing, protect fraud, or circumvent the law. circumvent: find a way around; overcome disregard the corporation entity: shareholders are help instead of the corporation

Types of Dividends and other Distributions: 4. Legal Restrictions

Legal Restriction on Cash Dividends: dividends my be paid only if the following test are satisfied: 1. Cash Flow Test: a corporation must not be or become insolvent (unable to pay its debts as they become due in the usual course of business) -if you can't pay bills like rent, conEd, employees etc. 2. Balance Sheet Test: After paying dividend the corp must show that Assets equal Liabilities plus equity 3. As long as, when the B.O.D. declares a dividend they must pay.

Classification of Corporations: Profit vs. Nonprofit Corporations

Profit Corporation: one founded to operate business for profit ex: IBM, Apple, Microsoft, etc. Nonprofit Organization: one whose profits must be exclusively for charitable, educational, or scientific purposes.

Formation of A Corporation: 1. Promoters 2. Subscribers

Promoters: person who takes the preliminary steps to organize a corporation ex: getting a space, getting an accountant, etc. Promoters contract: a promoter is personally liable for any contracts signed before the corporation was formed. Unless the contract states otherwise. Subscribers: person who agrees to purchase the initial stock in a corporation.

Classification of Corporations: Public vs. Private Corporations

Public Corporation: owned and operated by the gov't. ex: FDIC: Fed. deposit insurance corporation (insures bank deposits. local, gov't, state, town etc.) Private Corporation: owned and operated by private individuals. ex: IBM Microsoft, Apple, Netflix

Classification of Corporations: Publicly Held vs. Privately Held Corporations

Publicly Held Corporation: one whose shares are owned by a large number of people and are widely traded. -you can get these at NYSE -it is any corp. owned with a large number of people ex: McDonalds, Apple, etc Privately Held Corporation: one that is owned by few shareholders and whose shares aren't actively traded. -can't get at NYSE ex: Facebook started as a privately held and now is a publicly held corporation

Formalities of Incorporation: Bylaws

Rules governing a corporation's internal management

Formalities of Incorporation: 3. Selection of Name 4. Incorporators

Selection of name: the name must clearly designate the entity as a corporation by ending with the words: corporation/corp/Incorporated/inc. Incorporators: the persons who sign the articles of incorporation. They are usually the owners.

Corporate Attributes: Centralized Management

Shareholders of a corporation elect the board of directors to manage its business affairs; the board appoints officers to run the day-to-day operations of the business. centralized: applies to lg. corps. B.O.D.: makes the decisions officers: carries it out

Chapter 35: Financial Structure 1. Debt Securities 2. Equity Securities 3. Dividends

They are used to raise capital

Debt Securities: 4. Unsecured Bonds 5. Secured Bonds

Unsecured Bond: called debentures if the corporation defaults, the bond holder loses everything -cannot pay interest or principles 5. Secured Bond: If the corporation defaults the bond holder gets his money by claiming the corporation's assets or property - Bond insurance (AIG)- government ought bond to save from crisis

Classification of Corporations: Subchapter S Corporation

electing to be taxed as a partnership under the Internal Revenue code -strategy to avoid double taxation - requires less than 100 shareholders.

Chapter 36: Management Structure Role of: 1. Shareholders 2. Officers 3. Directors

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Chapter 37: Fundamental Changes 1. Charter Amendment 2. Combinations 3. Dissolution

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