Chapter 15

Revised Model Business Corporation Act (RMBCA)

Model act drafted by the American Law Institute and adopted by over half of the states as a template for compiling their own statutes governing corporations.

Business Judgment Rule (BJR)

Most courts define good faith by requiring directors and officers to clear three hurdles to obtain protection of the rule: -No private interest -Best information -Rational belief

Business Corporation Law

Often the title for a specific state law that covers such matters as the structure of the corporation, oversight of the activity of the corporation's managers, rights of the principals in the case of the sale of assets or ownership interests, annual reporting requirements, and other issues that affect the internal rules of the business venture.

Corporations that do not sell ownership for interests through a broker to the general public or financial institutions are categorized as: Privately Held Publicly held Public interest equity firms

Privately Held

IPO (initial public offering)

Some companies opt to proceed through a very complex and time-consuming process of converting the corporation from privately held to publicly held by engaging in an initial public offering -may raise equity by selling its shares to the general public and to financial institutions

Choice of State Incorporation

Some corporations choose the state of Delawareas the state of incorporation because of the advantages of that state's permissive rules on the flexibility of how a corporation's managers operate the business. However, most corporations are better served by incorporating in the state where they are headquartered

When does double taxation occur?

Taxation occurs at both 1. the corporate level, when income is earned by the corporation, and 2. the individual level, when it is distributed as a dividend (profit) to the shareholder.

Taxation

"C" corporations are considered a separate legal, taxable entity from the owners for income tax purposes. Therefore, corporations pay tax on their earnings and then tax is paid again if corporate earnings are distributed to shareholders in the form of dividends This system is known as double taxation

Formation

*A corporation has the most formal filing and reporting requirements *document must state the corporation name, purpose, number of shares issued, and address of the corporation's headquarters *This document is known as the articles of incorporation

DEBT

*Corporations often borrow money from commercial lenders (such as banks) to fund day-to-day operations. *For larger projects, corporations may also use more sophisticated forms of debt such as issuing bonds or debentures

Capitalization

-Corporations have perhaps the widest range of options when considering how to finance their operations. -They may be funded through debt or through the selling of equity in a variety of forms

Duty of Care

-Negligence -Failure to act with diligence -Rubber stamp

Shareholders

-Power to elect and remove directors -Power to veto fundamental changes to corporation, e.g. sale of all assets, mergers, issuing more capital stock, and issuing bonds -Shareholders also must approve any changes in the structure of the corporation through amending the articles of incorporation or bylaws.

Board of Directors

-Sets strategy and policies of the corporation, including payment of dividends -Also has important oversight functions -Most planning initiatives that result in a change to the corporation, such as an acquisition of another corporation's assets or stock, are overseen by the board prior to submitting the plan to shareholders for approval

Officers

-The corporation's officers are appointed by, and may be removed by, the board of directors. -The officers carry out the day-to-day operations of the corporation and execute the strategy and mandates set out by the board of directors.

Which of the following are typically handled at the initial organizational meeting? I. Officers and directors are appointed/elected II. Shares of Stock are issues III. Personal guarantees for all corporate debt IV. File Articles of incorporation a. I & II b. I,II,III c. II, III,IV d. I, III, IV

A

Initial Organizational Meeting

Bylaws (rules by which corp. is run) Board of directors and officers Issuance of shares

Equity

Corporations also sell equity to capitalize their operations. For modest amounts of funding, corporations may turn to private investors or groups of investors. Sometimes Corporation will hire a registered broker-dealer to handle larger scale IPOs.

Corporate Veil

The liability protection afforded to shareholders, directors, and officers of a corporation whereby they are insulated from personal liability in the event that the corporation runs up large debts or suffers some liability.

shareholders

The owners of a corporation; act principally through electing and removing directors and approving or withholding approval of major corporate decisions.

Venture Capital Firms

Venture capital is funding provided by a group of professional investors for use in a developing business. These firms are frequently focused on one industry The major advantage of venture capital is that these firms often have substantial resources and are also a source of expertise in operations and expansion of the corporation.

Business Judgement Rule

a corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgement and bad business decisions

Double taxation

a corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive

Foreign

a corporation that does business in one state but is chartered in another state.

Corporation

a fictious legal entity that exists as a independent "person" separate from its principals

Duty of Loyalty

a fiduciary duty owed to shareholders by officers, directors, and controlling shareholders; requires that the fiduciaries put the corporations interests ahead of their own and do not engage in self dealing or conflicts of interest.

FFC operates 50 produces stands across Georgia and 100 stands in its home state of Florida. They are incorporated in Florida. In Florida, what category of corporation does FFC fall into? 1. Domestic 2. Foreign 3. Off-shore 4. Non-profit

domestic

The formation of corporation is governed by which of the following: 1. Federal Statutes 2. State Statutes 3. Fed Reg 4. State Common Law

state statutes

articles of incorporation

the document filed with a state authority that sets into motion the incorporation process; includes the corporation's name and purpose, the number of shares issued, and the address of corporation's head quarter's

Corporate Veil

this is a liability protection

public

those formed by a government body to serve the public at large, such as public mass transit companies

professional

those in which the ownership is restricted to a particular profession licensed in a certain field

Nonprofit

those that do not have profit seeking owners but rather exist to perform some service to the public at large

Limiting Director Liability

A corporate board typically has several measures in place designed to limit their liability: -oversight committees to monitor executive management, and -consulting/outside professional firms to ensure validity of the information and data used by the board in their decision making.

Alien

A corporation formed outside the United States that transacts business in the united states

privately held corporation

A corporation that does not sell ownership interests through sales via a broker to the general public or to financial institutions or investors.

Duty of Care

A fiduciary duty owed to shareholders by officers and directors; requires that the fiduciaries exercise the degree of skill, diligence, and care that a reasonably prudent person would exercise under the same circumstances, acting in good faith and in a manner that is reasonably calculated to advance the best interests of the corporation.

Business Judgement Rule

A principle that protects corporate officers and directors from liability when they have made an unwise decision that results in a loss to the corporation but they have acted in good faith, had no private financial self-interest, and used diligence to acquire the best information related to the decision.

Piercing the Corporate Veil

Action in which a court discards the corporate veil and holds some or all of the shareholders personally liable because fairness demands doing so in certain cases of inadequate capitalization, fraud, and failure to follow corporate formalities.

personal guarantees

Banks, landlords, and other creditors are fully aware of the limited liability provided by the corporate veil. Thus, if a corporation is a start-up or has limited assets, these creditors will almost always require that the shareholders give a personal guarantee.

Domestic

In the state of its incorporation, a corporation is referred to as a domestic corporation

Officers

Individuals appointed by the board of directors to carry out the directors' set course of direction through management of the day-to-day operations of the business.

directors

Individuals responsible for oversight and management of the corporation's course of direction.