Corporation Vocab

Outstanding Stock

When stock is authorized and issued, it is "outstanding" as in "out in the world." That "out" stock can be "drawn back in" only through purchase or redemption (e.g. forced purchase). A company may not "delete" its stock because it must provide shareholders with adequate compensation for the good.

Preemptive Rights

When the board of directors decides to issue new shares (in a growing company or to encourage new investors), the rights of the existing shareholders to purchase those shares first in order to maintain their proportional ownership in the corporation = preemptive rights. MBCA explicitly precludes preemptive rights unless it says so in the articles.

Professional Corporation

A professional corporation may only limit its purpose into the rendering of a professional service of that type. Moreover the shareholders in such a corporation must also be a member of that profession (e.g. a law firm). Additionally, a professional corporation does protect limited liability but does not protect liability via malpractice.

Generally Accepted Accounting Principles ("GAAP")

A set of accounting and financial reporting standards Primarily created by the Financial Accounting Standards Board ("FASB"), a private, independent organization of accounting experts (CPAs, corporate executives, financial analysts, academics) that establish and interpret GAAP. Because it is a private organization, FASB's promulgation of GAAP doesn't officially legally bind accountants In reality, GAAP is very important: Violating GAAP is generally the legal definition of professional negligence for accountants The Securities and Exchange Commission ("SEC") generally strongly defers to GAAP Investors, lenders, and trade creditors oven insist on receiving financial statements complying will GAAP before investing, lending, or extending credit

Anti-Takeover Laws

Wave of takeovers in 1980's Takeover wave led to many states adopting laws designed to prevent takeovers of local corporations opposed by the corporations' management Supremacy Clause (Williams Act Federal Statute) Tender offers must remain open for at least 20 days Shareholders have 60 days to withdraw tendered shares that haven't yet been bought by the offeror Intended to give shareholders time to adequately consider a tender offer Also intended to treat offerors and targets equally in the conduct of tender offers Commerce Clause

Valuation - Salvage Value

What the corporation is worth if everything was scrapped and sold for parts.

Valuation - Book Value

What the corporation is worth not including intangible assets or marketability

Ultra Vires

"Beyond the scope" when the corporation that has a stated narrow business purpose in its articles of incorporation and then subsequently engages in activities OUTSIDE the stated purpose ,the corporation has engaged in an ultra vires act. When a corporation engages in conduct not authorized by its express or implied powers, the conduct is deemed ultra vires and void. Falls under MBCA §3.01-02 for "purposes and powers." However, when a 3rd party enters into a transaction with the corporation in an ultra vires act, the third party generally cannot assert that the corporation has acted outside those powers to escape liability. Ultra Vires is rarely used now: (1) Courts started interpreting corporate powers more broadly Decline in view of corporation as being only a creation of the state Inequities resulting from acts deemed ultra vires (2) When states began to enact general incorporation statutes, lawyers would just draft corporate purpose and powers very broadly An ultra vires action can be challenged in only THREE ways: 1. A shareholder can file suit to enjoin 2. The corporation can take action against a director, officer, or employee who engages in such out of scope action. 3. The state may initiate a proceeding against the corporation.

Hostile Takeovers (via Tender Offers)

"Hostile" buyer makes tender offer (an offer of tender = cash for stocks) to target company's shareholders (i.e., offers to buy their shares for a certain price). The price is usually a large premium over the current market price to incentivize to sell. If sufficient number of shares are "tendered" (and other conditions are satisfied) to give buyer control of the company, the buyer purchases the tendered shares. Buyer then usually buys the untendered shares in a merger After gaining control, buyer replaces target company's management and makes changes to the company's operations.

6 Most Important Characteristics of a Corporation

1) Centralized Management Shareholders elect board of directors Board of directors manage and oversee the corporation (particularly the officers - CEO, CFO, etc.) 2) Limited Liability Liability for the corporation's debts and obligations is limited to the assets of the corporation 3) Double Taxation (1) The corporation is taxed for on any profits it makes. (2) Shareholders are taxed on any profits they get from the corporation (i.e. dividends, capital gains) 4) Separate Legal Entity Separate legal identity from corporation's owners, managers, and employees 5) Transferability of Ownership Interests Ownership interests are called "stock" and are measured in "shares" Owners called "stockholders" or "shareholders" Owners can transfer their ownership interests to others by transferring their shares 6) Perpetual Existence Corporation continues even if all original shareholders and managers are gone

Voluntary Dissolution

1. If NO stock has been issued the incorporators/directors may dissolve a corporation by majority vote. 2. If stock HAS been issued, then the i) the board of directors must adopt the dissolution and ii) majority of shareholders approve.

Factors in Piercing Corporate Veil

1. Intermingling of Assets and Affairs of the Corporation and Shareholder Intermingling of assets Directing corporate revenue to a controlling shareholder's bank account Payment by corporation of shareholder's individual obligations Corporation and shareholder have same address 2. Disregard of Corporate Formalities Failing to hold Shareholder or Board meetings Absence of corporate records Using a single endorsement stamp for all affiliated companie Parent's B establishing salaries, appointing auditors, and declaring subsidiary's dividends. 3. Excessive Shareholder participation in affairs of the corporation Shareholder's participation in day-to-day operations Shareholder's determination of important business decisions, bypassing corporation's directors and officers Shareholder's giving of instructions to the corporation's personnel or use of shareholder's own personnel in the conduct of the corporation's affairs. 4. Deception 5. Inadequate Capitalization Really is a measure of bad faith Inadequacy measured at time of corporation's inception Role of Insurance Can substitute for bad balance sheet Statutory/regulatory minimum can be safe harbor Not required unless statutory/regulatory requirement

Balance Sheet

A balance sheet is a summary of an entity's financial resources and obligations. Also, a balance sheet is a snapshot of these resources and obligations at a particular time. In other words, a particular balance sheet exists at a particular time. ASSETS: What the entity owns Cash, Accounts Receivable, Inventory, Equipment LIABILITIES: What the entity owes Accounts Payable, Notes Payable EQUITY: Residual interest in assets, after subtracting liabilities (i.e., owners' interest) For businesses, Equity = Owners' Fundamental Accounting Equation: ASSETS = LIABILITIES + EQUITY Liabilities Different kinds of liabilities Short term and long-term Things we owe people. Equity Accounts Initial money paid in by investors Plus retained earnings (net income that we've kept).

Dividend

A cash surplus from the corporation that is then distributed (filtered down) to its shareholders by rank of stock.

Record Stock Owners

A corporation maintains a list of shareholders who are entitled to vote. If you're on the list, you're on "Record" as able to vote.

Stock Acquisition Merger

A corporation may acquire stock in another corporation and secure control of that corporation without going through the process of a statutory merger. There are 2 ways that corporations can acquire stock in another company: 1. Stock-for-Stock Exchange - when a corporation exchanges its own stock for the amount of stock in the other corporation e.g. a stock swap. Generally a shareholder may retain his stock and not participate in the swap. However, when there is a full company "share exchange" that parallels a merger, all shareholders are required to participate in the swap. Dissenting shareholders have the right of appraisal. 2. Paying Cash or Property For Stock Exchange

Solvency Distribution Test

A corporation may not make distributions if it would risk company insolvency. Solvency is tested in two ways: 1. Equity Test: a corporation must have enough cash to pay off its debts in case it liquidates before it can distribute the leftover cash to shareholders. 2. Balance Sheet Test: a corporation will issue a balance sheet in which its total assets (income + equity) must exceed its liabilities.

Usurping Corporate Opportunity Conflict of Interest

A director may also violate his duty of loyalty when he puts his own needs before the company and takes advantage of a deal first before bringing it to the corporation. Determining whether the opportunity is one that must be first offered to the corporation courts have applied one of three tests: 1. Interest or Expectancy Test - key is whether the corporation had an EXISTING interest (option to buy) or an expectancy arising from an existing right (purchasing property currently leased). DEFINITION: Corporation has an interest or expectancy in the opportunity ISSUE: How broadly should "interest or expectancy" be defined? Corporation already has a contract to buy the opportunity in question Corp has some property interest in the opportunity Corp is actively seeking this particular opportunity Corp is simply seeking this general type of opportunity 2. Line of Business Test - the key is whether the opportunity is within the corporation's current or prospective line or business. Whether an opportunity satisfies this test frequently turns on how expansively the corporation's line of business is characterized. Definition: Is the opportunity in the corporation's line of business? Key Issue: How broadly do you define a company's line of business? 3. Fairness Test Whether D learned about the opportunity in his official or personal capacity Whether part of D's job is to acquire such opportunities for the corp Whether the defendant used corp assets to find or develop the opportunity Importance of the opportunity to the corp Whether the corp was seeking the opportunity Whether the D used the opportunity to compete with the corp Whether the D later sold the opportunity to the corp Other factors: i) Relationship between person offering opportunity, conflicting director, and corporation ii) how and when the director acquired knowledge of the opportunity and how fast he brought it to the corporation (if at all) iii) the relationship of director to the corporation If a director engages in a business venture that competes with the corporation, it is directly contrary to the duty of loyalty. However, a director may engage in unrelated business outside the corporation without fault. Defenses: Corporation rejected the opportunity Corporation was financially unable to take the opportunity Third party unwilling to deal with the corporation Ultra vires / legal incapacity to take the opportunity

Director Duty of Loyalty

A director must act in a manner the director REASONABLY BELIEVES to be in the best interest of the corporation (both an objective 'reasonably' and subjective 'believes' test). This usually means that the corporations interests must come first, and the most common way to violate the duty of loyalty is when a director puts his/her personal gain or interests before those of the corporation.

Director Duty of Care

A director owes two basic duties: 1. Duty of care 2. Duty of loyalty Must act in good faith In a manner the director reasonably believes to be in the best interest of the corporation. Directors have a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. Directors can rely on the performance and information from: 1. Officers and other employees of the incorporation 2. Outside attorneys, accountants, or other expert individuals retained by the corporation. 3. A committee of the board of which the director is not a member. Directors have the authority to make charitable contributions in the promotion of the goodwill of business but must be less than 1% of capital and directed towards an institution owning no more than 10% of the company stock.

Self-Dealing Conflict of Interest

A director who engages in a conflict of interest transaction with his OWN company (self dealing) has violated his duty of loyalty unless he can be protected under safe harbor rules (with adequate protection for his/her actions). The BJR does not apply when the conflict is self-dealing. In no instance can a director profit at the corporation's expense. Courts will also find self dealing if the transaction would harm minority shareholders. Self-dealing or conflict transactions require approval of the board of directors and complete disclosure of the financial significance to the director it would reasonably expect to influence the director in the transaction. (Only financial significance. Emotional significance makes no difference). This also extends to the director's related persons (friends, family, extended family, adopted family, close family friends, anyone who resides in the home, etc.) However a casual social acquaintance with another director should not be regarded as a disqualifying relationship. MBCA 1.43(a)-(c) Self-dealing is not always an immediate liability sentence. Can be accepted under a 'safe harbor.' Did disinterested and independent directors approve the transaction? Did disinterested shareholders approve the transaction Is the Transaction "Fair" to the Corporation? a. Fair Terms (substantive) b. Arrived at by Fair Process (procedural) Must also be fair to the corporation. Fairness is. . . . a. Fair Price/Terms (substantive) - Price (arms length transaction) - Interests of corporation - need - ability to pay b. Fair Dealing: Arrived at by Fair Process (procedural) - full disclosure of conflict and of the subject matter of the transaction - improper pressure on other directors

Holdover Director

A director whose term has expired may continue to serve until a replacement is selected.

Parent-Subsidiary Merger

A merger between a parent corporation and a subsidiary when the parent owns at least 90% of voting power of each class of stock does not require shareholder approval. Neither does it required approval by the subsidiary corporation's board of directors.

Mergers

A merger is a combination of two or more corporations leaving one behind (e.g. a-->b = B). This occurs in a 3 step process: 1. Board of directors of EACH corp. must approve 2. Majority of shareholders of each corp. must approve - Shareholder approval requires a majority vote at a meeting in which shareholder quorum is present - If a corporation has more than one class of stock, then holders of that class of stock must also approve 3. The required documents must be filed with state This type of merger is an agreed upon merger (not a takeover or de facto merger). Thus it is called a statutory merger.

Alter Ego Theory

A shareholder can pierce the corporate veil if the corporation was merely a facade for a dominant shareholder, also an "alter ego" excuse. Alter ego means that one individual controlled and dominated the corporation and by not holding them personally liable it would be "manifestly and singularly unfair." Additionally, a subsidiary company of a corporation (the baby in the parent corporation) may be considered an 'alter ego' if the companies share directors, use the same legal/auditing/other departments, file consolidated tax returns and prepare consolidated financial reports. The failure of an alter ego shareholder to respect the corporate entity is INSUFFICIENT; the failure must also adversely affect the third party shareholder's ability to recover from the corporation. It cannot just be an "attitude" but provable harm.

Dividend Distribution Suit

A shareholder can sue to enforce the right to compel dividends (as it is a primary and personal right to a shareholder) but MUST bear burden of proof that: 1) there are sufficient funds legally available to pay the dividend 2) the reason directors have not paid it is evidence of their bad faith The point of a corporation is to make money for stockholders, and a withholding of money from shareholders violates the director's duty of loyalty.

Proxy Voting

A shareholder may vote by proxy (agent) executed in a written agreement and delivered to the corporation. A proxy is auto valid for 11 months unless otherwise specified. A proxy is always revocable unless otherwise specified. Any act by the original shareholder inconsistent with his proxy invalidates the proxy. If a second proxy is assigned, the first proxy becomes void. Shareholders are sent: (1) Notice of the annual shareholder meeting (2) Proxy statement describing the issues to be voted on (3) Form of Proxy Card Federal Regulation of Proxies Applies to "public companies" Securities (debt or equity) listed on stock exchange, or At least 500 stockholders + $10 million year-end assets Regulate all "proxy solicitations" (1) request for proxy, (2) request against, (3) "reasonably calculated" to obtain a proxy Second Circuit: part of continuous plan intended to end in solicitation Federal proxy regulation Form of proxy card Format / Font Each matter: Yes-No-Abstain Directors: For/Withhold (plurality voting) Proxy statement - information on matters to be voted on Annual report to shareholders - if directors to be elected Rule 14-a6 At least 10 days before it solicits proxies, management must file the proxy statement and the form of proxy with the SEC SEC reviews these preliminary filings and comments on their adequacy, giving management a chance to make changes. No preliminary filing necessary if the solicitation relates only to electing unopposed directors ratifying selection of auditors shareholder proposals All final proxy materials, whether or not they have been filed preliminarily, must be filed with the SEC before or when they are sent to shareholders Management can send out filed preliminary proxy statement (but no form of proxy) to shareholders to get their reactions

Consolidation

A type of merger in which two corporations merge to create a new corporation altogether. (e.g. A+B = C)

Stock Dividends

Are NOT distributions. A corporation may issue its own stock (more authorized shares) without charge in lieu of making a distribution of cash or other property. AKA stock dividends, stock splits, these transactions do not alter corporation assets or liability so they do not count as a distribution.

Legal Capital

Addresses two questions: 1. What amount must the corporation receive for issuing its shares? 2. How much in distributions (dividends, etc.) may corporation distribute to shareholders? Question 1 relates to protecting other shareholders from dilution (and, to some extent, to protecting debtholders) Question 2 relates to protecting debtholders' senior claim on corporate assets. By 1970's, few people believed par value protected shareholders or debtholders Many states now permit issuance of low-par or no-par stock, but require board to designate some amount of assets as the corporation's "capital" Some states (and Model Code) have abolished the notion of legal capital.

Income Statement

An income statement reflects the financial performance of an entity during a certain period of time. An income statement lists revenues generated and expenses incurred during that period. REVENUES (from delivering goods and services) $ from selling sweaters or drafting wills EXPENSES (from delivering goods and services) Cost of sweaters sold, Secretary's salary, Rental cost of office space NET INCOME (Difference between Revenues and Expenses) REVENUES - EXPENSES = NET INCOME

Gift and Waste BJR Invalidation

Approval of conflict transaction by a fully formed disinterested board of directors is protected under BJR from court scrutiny and limits judicial review unless the plaintiff carries the burden of proof to show that the deal was a gift or was corporate waste. Standard: Decision lacks a rational business purpose (i.e., can't rationally believe in best interests of the corporation). Examples: MBCA: "When a decision respecting the corporation's best interest is so far removed from the realm of reason (e.g., corporate waste)" "[S]o unreasonable as to fall outside of sound discretion." Delaware Supreme Court: "[W]hat the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid."

Dissolution of a Corporation

At any time a corporation may terminate its status as a corporation. There are 2 types of dissolution: voluntary and court mandated. The effect of dissolution is that the corporation still exists as a corporation so long as it takes to wind up affairs and liquidate and payout assets but cannot exist to do other things like transferring titles, changing articles or requirements, etc.

Board Directors

Board of Directors can have as few as one director regardless of number of shareholders but the board is usually dictated by its bylaws or articles of incorporation. The director must be a natural person (not another corporation). Shareholders must select directors at the annual shareholders' meeting and may be elected by straight or cumulative voting and by one or more classes of stock. Typically a director serves for 1 year term, but sometimes terms are staggered (to limit the impact of cumulative voting). Removal of directors can be removed by shareholders with or without cause. A director may only be removed at a meeting called for the purpose of removing him. The director who was elected by a particular voting class of stock can only be removed by that same class or by court proceeding. When there is a vacancy on the board or an increase in the number of directors, either the shareholders or directors may fill the vacancy. Directors of a corporation may receive compensation for serving as directors.

General Partnership (GP)

Both ownership and control of the business organization is in the hands of more than one person: the "partners"

Common Stock

Common stock has two characteristics: 1) Entitled to vote on matters of corporate governance (director elections, etc.) and basic ownership interest in a corporation.

Valuation of a Company

Context matters (control v. passive investor) Valuation is an art, not a science Valuations typically involve explicit or implicit forecasts about the future Minor changes in assumptions can result in dramatic differences in value Develop range of arguably reasonable valuations Beware of conflicts of interest or psychological biases in the person giving a valuation Beware of unusual valuation metrics (Price/Eyeballs ratio, etc.)

Piercing the Corporate Veil

Definition: Under certain circumstances, when a corporation has insufficient assets to pay a [tort or contract] creditor, the court will hold one or more shareholders of the corporation personally liable for the corporation's debt. One of the primary benefits is limited personal liability. Parties to a corporation are only liable to the extent of their investment. This limited liability is occasionally overcome, and certain officers and directors can be held PERSONALLY liable for the actions they have taken on behalf of the corporation. This is known as "piercing the corporate veil" as if the officers/directors hide behind the corporate veil and act from behind the curtain. If a plaintiff can pierce the corporate veil, then a corporation's existence is ignored and the shareholders and officers of the corporation are all held personally liable. The courts are hesitant to hold someone personally liable for a corporation's choices but WILL if: 1) the corporation was markedly noncompliant, or 2) if holding ONLY the corporation liable would be "manifestly and singularly unfair" to the plaintiff. There is NO bright-line rule in piercing the corporate veil, only a totality of the circumstances test. In general, a plaintiff must prove the incorporation was merely a formality and the corporation neglected corporate law and protocols. This is often the case when a corporation transfers its assets into another corporation (shell corp.) and still retains the same management and shareholders. ALSO with single-person or small close corporations managed badly. Factors for the totality of circumstances include: disregard of corporate formalities; use of corporate assets as a shareholder assets (close); self-dealing; using corporate funds personally; using the corporation for tax or statutory purposes; a single shareholder's domination; etc. Courts can find one reason particularly compelling. Three Approaches to Piercing the Corporate Veil 1. "Instrumentality" Doctrine Control, not merely majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity had at the time no separate mind, will or existence of its own [i.e., it is an instrumentality of the shareholder]; Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of the P's legal rights; and The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. 2. "Alter Ego" Doctrine Unity of ownership and interest exists between the corporation and its controlling stockholder such that the corporation has ceased to exist as a separate entity and the corporation has been relegated to the status of the controlling stockholder's alter ego, and To recognize the corporation and its controlling stockholder as separate entities would be sanctioning fraud or would lead to an inequitable result 3. "Identity" Doctrine "If a plaintiff can show that there was such a unity of interest and ownership that the independence of the corporation had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation of one corporation for the benefit of the whole enterprise."

Agency

Definition: A consensual relationship between a principal and an agent who agrees to act on the principal's behalf. Usually comes with questions of authority to bind principal. An agent owes the principal: Duty of Loyalty Duty of Care Duty of Obedience

Inherent Authority

Definition: Catch-all doctrine based on fairness. i.e., agent has the power to bind the principal in some circumstances even though the neither actual nor apparent authority exists Best viewed as an implied term (gap-filling device) in the contract between a principal and all who deal with his agents, that courts use to achieve a fair and efficient allocation of losses from an agent's unauthorized actions. An agent's inherent authority subjects his principal to liability for acts done on his account which: usually accompany or are incidental to transactions which the agent is authorized to conduct if, even though -- in this particular case -- they were forbidden by the principal, the third party reasonably believes that the agent is authorized to do them, and the third party has no notice that the agent is not so authorized. The law should protect the reasonable expectations of outsiders who deal with an agent because It is unfair for principal to have benefit of the work of the agent without making it responsible (to some extent) for the agent's excesses. It is usually easier for the principal rather than the third party to prevent an agent's excesses Example: Principal's well-known, long-term Agent decides to sell Principal's horses for $500 without her permission. Buyers are unaware that Agent didn't have permission.

Actual Authority

Definition: Principal EXPRESSLY or IMPLICITLY manifests his consent to the agent. The AGENT must have reasonably believed that he had authority. Can also come from behavior of other agents Third party's belief is irrelevant  Example: Principal tells Agent to sell all of Principal's horses for $500 each. Agent sells a horse for $500 cash. √ Agent sells a horse for $500 check. √ Agent trades a horse for a used car worth $500 X Unless such trades are a normal practice in the locality, or Unless another Agent for the Principal has made such a trade in the past

Ratification

Definition: Principal affirms a previously unauthorized act Ratification can be informal or formal Ratification can be by words or by conduct Example: Without permission, Principal's new employee decides to sell Principal's horses for $200 (well below market value) for later pick-up without her permission. When Principal finds out about the sale, the Principal says "That's OK with me," or When the Buyer arrives to pick up the horse, the Principal accepts the check from the Buyer

Estoppel

Definition: Principal knew that alleged agent was doing something that might cause others to believe he was an agent, but didn't do anything to stop it Example: Principal's well-known, long-term Agent decides to sell Principal's horses for $500 without her permission. Buyers are unaware that Agent didn't have permission. Immediately after first horse is sold, the Buyer calls Principal to thank Principal for selling the horse. After the call, Principal does nothing to stop Agent from selling more horses.

Fairness Opinion (Mergers and Takeovers)

Definition: The professional opinion of an investment bank, provided for a fee, regarding the fairness of a price offered in a merger or takeover. Conflict of Interest: Investment banks make much more money if the transaction occurs, i.e. if the price is deemed "fair"

Apparent Authority

Definition: Third party "reasonably believed" that the agent had authority. 3rd party who is dealing with the agent must be able to point to something that the apparent principal did that made it reasonable for 3rd party to believe that the agent had actual authority Agent's belief or intent is irrelevant Example: Principal tells Agent to sell all of Principal's horses - except Secretariat - for $500 each. Principal then sends a letter to prospective buyers saying "I'm selling my horses. See Andy (Agent) to purchase one." Andy sells Secretariat.

Investment Banker Valuation of Stock

Definition: To secure underwriting business, investment banks make a "pitch" to the company, including an estimate of the value of the company's stock. Problem: More likely to get underwriting business if the valuation you present is higher.

Good Faith Obligation

Directors have the obligation to act in good faith when making decisions on behalf of the corporation; so long as the duties are fulfilled and the directors acted in good faith (Believing it for the best) neither the corporation nor its directors will be liable to shareholders for the unfavorable transactions. If the director breaches the obligation of good faith, it will be a "sustained and systematic failure." Ex: Directors are not liable to shareholders for poor hiring choices so long as they were consistent with duty of care, loyalty, and good faith.

Director Meetings

Directors may hold regular or special meetings. A director who attends the regular meetings does not require notice unless the time/place of the meeting is changed. Meetings do not have to be in the state of incorporation or principal place of business. Directors will be present at meetings if everyone can be heard. Directors will always require notice and purpose of a special meeting. A director may waive notice of either meeting at any time by a signed written waiver. Contra, a director will automatically waive notice if he attends the meeting unless he promptly a) delivers written notice to be included in the log, or b) makes a prompt objection on the record to improper notice. The board of directors can take valid action without holding a meeting if they have a complete and unanimous written consent to take such action.

Corporate Takeovers

Directors of a corporation have the burden of proof that a buyback of shares is an attempt to remove a threat to the corporation and is in the corporation's best interest. Directors of the corporation have a duty to protect the company from takeover threats by shareholder majorities and other third parties thereby granting the directors the authority under BJR to exclude certain shareholders from a stock repurchase.

Statement of Retained Earnings

EQUITY AT BEGINNING OF PERIOD + Net Income + Additional Investment During Period (stock issued) - Withdrawals of Equity During Period (stock bought back, dividends) = EQUITY AT END OF PERIOD Also called "Statement of Shareholders' Equity" or "Statement of Retained Earnings"

Involuntary (Court Mandated) Dissolution

Either a shareholder or a creditor can bring an action for involuntary dissolution. The creditor may ONLY pursue dissolution action if the corporation is provably insolvent. The shareholder has four options for bringing the action: 1) Corporate assets are being misapplied or wasted 2) The directors are acting illegally, oppressively, fraudulently and the corporation would not recover even if they were immediately replaced. 3) The directors are deadlocked in the management of the corporation and no one is able to break the deadlock. This must cause irreparable injury to the corporation currently or in the threat of future. 4) The shareholders are deadlocked in voting powers and have failed to elect new directors.

Who Does A Corporate Attorney Represent?

Entity Theory Definition: Attorney represents the corporation, not the individuals who constitute the corporation Majority Rule Aggregate Theory Definition: Attorney represents the corporation AND the individuals who constitute the corporation Minority Rule Much more likely to be applied in close corporations than in large corporations Reasonable Representation Expectations Test Definition: An attorney-client relationship is created if an attorney leads a person to reasonably believe that they are a client. Problem: Not much case law on "reasonable expectations," and the existing law is not very coherent. Factors: Past business representation of the constituents before the entity became a corporation Past personal representation of constituents Provided advice on personal matters (even if corp exists at the time) Corporation was a partnership before incorporation and/or was run like a partnership after incorporation Courts split on importance of who is paying attorneys fees How to Prevent Confusion: Have attorney's engagement agreement specify: Exactly who you represent Who you do not represent Regularly remind the constituents of this How information conveyed to you by the parties will be treated for confidentiality purposes

Costs of Incorporating

Filing Fees Paid at time of incorporation Franchise Tax Paid (at least) annually to state of incorporation Income Tax Paid to federal gov't and states (based on income generated in that state)

State Corporation Statutes

For corporations incorporated in that state it describes How to incorporate Basic structure of corporation Many (default) rules for corporations Each state's statute is unique About 70% of states have statute based on Model Business Corporation Act ("MBCA") Drafted by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association Delaware General Corporation Law ("DGCL") is binding only in Delaware, but is influential on how other statutes develop Federal Law is less important than state law Significant federal regulation of business Antitrust, Civil Rights, Environment, Labor, Product Safety, etc. Publicly traded corps subject to registration and disclosure requirements Insider trading laws VIEW 1: Race to the Bottom: Because management chooses where to incorporate, states adopt corporate law that favors management over shareholders Examples: Laws permitting managers to resist hostile takeovers Broad application of business judgment rule VIEW 2: Race to the Top: Competition (i.e., market discipline) produces a corporate law that reflects the optimal bargain between shareholders and management.

Quorum

For the board of directors actions at a meeting to be valid, a quorum of directors (how many it is stated in the bylaws or articles to be so from majority to a percentage to make the action legally binding) must be present. Unlike a shareholder, a director must be present (at least auditorily) for his vote to count for quorum purposes. Voting pools (let's all vote this way) are unenforceable as each director is believed to have independent judgment. Directors may dissent from the quorum to estop liability. A director who voted AGAINST or abstained from an improper action can still incur personal liability if he was part of the board who took such action. In order to protect oneself from such action and forestall the liability the director must: 1. Promptly object to the holding of such a meeting (on record) 2. Ensure his dissent or abstention from the specific action is noted in the meeting record 3. Deliver written notice of his dissent to a presiding officer of the corporation

Discounted Cash Flow

Forecast company's future free cash flows Calculate discount rate (expected rate of return on comparably risky investments) Calculate present value of each future free cash flow (i.e. "discount the cash flow") Add together the present values of all of the future free cash flows. = That is the value of the company's operations. Common errors in the cash flow: Cash flow growth projection too high Growth harder as company size increases Profits attract competition Cost savings get competed away quickly Insufficient capital expenditures projected Wrong discount rate used

Stock Sale Restrictions

Generally a shareholder is free to sell (Give) his stock to anyone, anytime, for any price. There are 2 restrictions: 1. Limitations Imposed on Shareholders in Close-Corporations - restrictions of this type are always in close-corporations as owners seek to maintain control of their business and profits by limiting number of shareholders. 2. Penalties for Public Corporations Violate Federal Securities Law If there are restrictions on transferability/resale it must be printed clearly in a full and conspicuous statement on the stock. A shareholder that does not know about the restrictions are not bound to them, but are considered 'constructively knowledgable' if the restriction is conspicuous. Ex: no transfers, transfers that need consent, options to buy stock, right of first refusal (stock must be offered to corporation to buy first before someone else), corp. buyback, etc. Can be challenged as unreasonable restraint on alienation and are bound by contract law.

Cal. Corp. Code § 2115 Pseudo Foreign Corporations

Imposes various restrictions on internal affairs (including requiring cumulative voting). Only applies to non-public corps with more than half of property, payroll, and sales in California

Internal Affairs Doctrine

Is a choice of law rule Definition: The law of the state of incorporation governs the internal affairs of the corporation (with very few exceptions) Internal Affairs = relationships between owners (shareholders) and managers (directors and officers) Does not apply to other matters, such as: tort suits for injuries due to defective products breach of contract suit brought by supplier or customer Implications Decision of where to incorporate is very important Encourages states compete for incorporations Benefits of Doctrine Simplifies choice of law questions for multi-state businesses Facilitates planning and predictability Implications of Doctrine Decision of where to incorporate is very important States compete for incorporations and reincorporations

Market to Book Value Ratio (M/B Ratio)

Market value divided by book value = M/B Ratio Often market value is much higher for such intangible prices. Usually to value a company, the M/B ratio is multiplied by book value: Value of your company's stock = Average M/B Ratio x Your company's book value = 3.63 x $3.3 million = $12.0 million

Exculpatory Provision

May be included in articles shielding directors from liability for money damages for failure to exercise adequate care in their role as directors but does NOT protect from any breach of duty of loyalty, acts or omissions not in good faith, or any instances in which a director received financial personal benefit.

Bylaws

May contain any lawful provision in addition to articles of incorporation. If there is ever a conflict between the articles of incorporation and the bylaws, the articles of incorporation will control. The Board of Directors adopt the initial bylaws, but a majority vote by either directors or shareholders can adopt, amend, or repeal a bylaw.

S Corporations

Most corporations are "C Corporations" in that they undergo double taxation (tax on the corporation and then more tax on the dividends of the shareholders). When a corporation is made an "S corporation" then there is only one tax on the shareholders and none on the corporation itself. This is desirable for small close corporations because bo become an S corp. you must file with the IRS, and have no more than 100 shareholders. All shareholders must be actual people (not corporations) or estate/trusts. The S corporation also may not have different classes of stock and it must be unanimous among the shareholders to have an S corporation as they are the ones being taxed and scrutinized.

State Corporate Law

Must be incorporated under the law of a particular state Internal Affairs Doctrine: law of state of incorporation governs internal corporate affairs

Articles of Incorporation

Must include certain basic information about the corporation such as: 1. Name - must include corp. inc. or ltd. 2. Purpose - must include statement of purpose but MBCA presumes that each corporation has broadest lawful purpose unless a more limited purpose is defined in the articles of incorporation. 3. Corporate Powers - Articles of incorporation may also enumerate powers that the corporation possesses. 4. Corporations can have a perpetual existence but can limit their existence.

Beneficial Stock Owners

Not entitled to vote because they do not actually own the stock or there is some dispute to their ownership. They can sometimes compel their right to vote if they prove to the satisfaction of the board they have substantial ownership interest or other reasons (e.g. guardianship, incompetence of record owner, trust, etc.)

First Organizational Meeting

Once the articles of incorporation are filed, an organizational meeting is held at which the appointment of officers, adoption of bylaws, approval or contracts, and election of directors takes place. All corporations have the same general structure (i) shareholders (owners), (ii) directors for business management, and (iii) officers for day to day affairs.

Present Value of Cash Flow

Present Value = Future Value (Year n) / (1+r) n Factorial per Year = n

Price/Earning Ratio (P/E Ratio)

Price divided by earnings = PE Ratio Value of your company's stock = Average P/E Ratio x Your company's net income = 15.9 x $1 million = $15.9 million Two Ways to Calculate P/E Ratio = Total Market Value of Stock / Total Net Income = ($ 30 / share) x (10 mil shares) / $ 20 million = $300 million / $20 million = 15 P/E Ratio = Market Value per share / Earnings per Share = $ 30 / ($ 20 million / 10 million shares) = $30 / $2 = 15 Problems with P/E Ratio Which comparables are appropriate? Type of business Expected future growth Capital structure Extraordinary earnings can distort Meaningless if earnings are very negative or very low Assumes market is right Earnings are an accounting measure (cash is better)

Uniform Fraudulent Conveyance Act (UFCA)

Purpose Prevent creditors from being harmed by debtors' "fraudulent" transactions Remedy Defines certain transfers as fraudulent, especially those for inadequate consideration, to insiders or relatives, or with intent to harm debtor. Voids transaction or allows creditor to seize the transferred property. Problems Must identify fraudulent transaction Less remedy than piercing the corporate veil

Equitable Subordination

Purpose Prevent creditors from being harmed by insiders mischaracterizing their equity as debt Remedy Subordinate insider's claim to other creditors' claims (i.e. puts insiders "debt" claims behind other creditors in bankruptcy) Problem Less remedy than piercing

Sole Proprietorship

Simplest type of business organization Ownership and control of the business is in the hands of one person

Sarbanes-Oxley Act (2002) [Federal Corporate Law]

Reaction to recent corporate scandals Specifies functions and membership of board audit committees of public corps Requires senior corporate executives to personally certify the corporation's financial statements Prohibits certain transactions between public corporations and their managers Publicly traded corporations must have: Audit committee Monitor accounting policies and procedures Establish system for anonymous employee submissions CEO and CFO certification of financial statements Must evaluate internal controls ensuring material information is known to officers

Stock

Represents basic ownership in a corporation. The corporation issues stock beginning with initial stock from the articles of incorporation. Issuance of stock must be authorized by the board of directors. Stock can be paid for in a myriad of ways (not just money) but also property, intangible property, actions, etc. Once stock is paid for it is non-assessable. How stock is deemed paid for = the board of directors determines the consideration for it is adequate and once the decision is made, the adequacy of the decision cannot be challenged and the stock is paid in full. Stock is irrevocable (cannot be taken away once purchased nor withdrawn or recalled). In order to gain back and "subsume" stock, the corporation must buy back its own shares. In addition to shares of the company ("stock") corporations may also issue rights, options, or warrants to buy future stock.

SEC Interaction with Corporations

SEC retains the power to establish financial accounting and reporting standards for publicly held companies. Sarbanes-Oxley Act of 2002 explicitly allows the SEC to recognize as "generally accepted" those accounting principles established by standard-setting bodies meeting certain criteria (primarily independence) SEC continues to work with FASB in establishing these accounting principles and tends to sanction, as a matter of law, the GAAP rules that FASB promulgates.

Securities

Securities are two broad types by which a corporation obtains financing for its endeavours a) stocks and b) debt securities.

Voting Pool

Shareholders (NOT directors) can enter into a valid and binding voting agreement which provides the manner in which they will vote their shares. Because it is a type of binding contract, specific performance may be enforced against them if they break it or to pay out damages.

Voting Trust

Shareholders can put all their shares into one large trust technically owned and operated by ONE shareholder that does the administrative work and pays out the shares to others. A voting trust must be in writing, consented to, and only exists for 10 years before renewal.

Dissenting Shareholders to A Merger

Shareholders that have the right to vote also have the right of appraisal which means he may be able to force the corporation to buy back his stock at fair value determined by appraisal. This does NOT count if the stock is tradable on the NY Stock Market or like because the market is providing him with an opportunity to sell the stock at fair value. In order to dissent, the shareholder must vote against, give written notice to the corporation, demand payment in the notice and come to terms with the fair market value (if no agreement, court mandated).

Close Corporations

Sometimes "Closely-Held Corporations" e.g. private corporations between a few people, usually friends, and a limited number of shareholders (usually also directors and officers). The stock is also limited, not publically traded, and not often issued. Close corporations vary because shareholders owe a duty of good faith to one another and are in breach of that duty when terminating another shareholder in order to gain leverage. When a potential buyout or merger may occur in a close corporation there is a duty to disclose that potential when attempting to buy out another shareholder, even if the potential never materializes in order to protect the ownership interests of the corporation.

Preferred Stock

Stock that has preference over common stock on items in distribution (up one rung of the money food chain). Ex: Dissolution of the company feeds: Creditors -> Preferred Stock -> Common Stock

Par Value Stock

Stock that is "market value." It is often hard to assess how much stock is worth because of the flux of markets and unequal similarity scales. However, in some instances corporations may have a limit or bottom line for how much stock can sell for. "Par value" originally was the price at which initial shares were issued Eventually state statutes required the articles of incorporation to state the par value A company's "legal capital" was equal to the number of shares outstanding multiplied by the par value. In many financing transactions, a corporation's lawyer must confirm that all the corporation's stock is "validly issued, fully paid and nonassessable." This requires ensuring that the stock was issued in compliance with state law, including legal capital provisions. Some state's franchise fees are based on par value Directors can be liable for approving share issuances or distributions in violation of state law, including legal capital provisions. Shareholders can sometimes be liable if they pay less than par value ("watered stock liability")

Basic Corporation Structure

Stockholders --> Directors --> Officers --> Employees Ownership is not necessarily related to the control of the business.

Committees

The board of directors can take action through committees. A committee MAY consist of 2 or more directors. A majority of the directors must vote for the creation of a committee and the appointment of a committee director. The committee may exercise whatever powers are granted it, but may NOT: 1. Declare distributions 2. Recommend actions requiring shareholder approval 3. Fill vacancies on the board or committee with its own vote 4. Adopt, amend, or repeal bylaws. There are many types of committees. Sarbanes-Oxley Act: auditors cannot be employed by the corporation but the corporation must have an auditor committee.

Business Judgment Rule (BJR)

The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interest of the corporation. The exercise of managerial powers by a director is generally subject to the business judgment rule. A typical decision protected by the BJR includes whether to declare a dividend and the amount of any dividend. Generally a court will not interfere with the business judgment of a director or officer without a showing of fraud, illegality, or conflict of interest. "Directors are liable for negligence in the performance of their duties. Not being insurers, directors are not liable for errors of judgment or for mistakes while acting with reasonable skill and prudence." Smith v. Van Gorkom To overcome BJR it must be shown: 1. NO GOOD FAITH The director did not act in good faith 2. NOT INFORMED The director was not informed to the extent that the director reasonably believed was necessary before making a decisions 3. NOT OBJECTIVE The director did not show objectivity or independence from director's relation to or control by another having a material interest in the challenged conduct 4. NO ATTENTION There was sustained failure by the director to devote attention to an ongoing oversight of business affairs of the corporation 5. NO INVESTIGATION The director failed to timely investigate a matter of significant material concern after being altered in a manner that would have caused a reasonably director to do so 6. RECEIVED FINANCIAL The director received a financial benefit to which he was not entitled or any other breach of duty to the corporation A director of a corporation may be held personally liable if the director neglects to provide the ordinary care of keeping current with corporate affairs that a director would normally do in that position and neglect is the proximate cause of the damages.

Amendment of Articles of Incorporation

The corporation can amend its articles with any lawful provision and once the necessary approval is obtained, the articles of amendment must be filed with the state. 1. If NO stock has been issued then the incorporators can amend the articles of incorporation. 2. If stock HAS been issued, then corporations generally must follow a 2 step approval process. i) The board of directors must adopt the amendment to the articles of incorporation and ii) the board must submit the amendment to the shareholders for approval of majority vote.

Distribution

The transfer of cash or property from a corporation to one of its shareholders. The most common form of a distribution is cash, which is called a "dividend." The power to authorize a distribution lies with the board of directors or any committee they have named to do so therein. A shareholder cannot compel the board to authorize a distribution because distributions are discretionary. However, a court MAY order a distribution if a shareholder can prove the board is acting in bad faith or selectively distributing (to its own pockets). "'Distribution' means a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or payment of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; or otherwise." A director who votes/assents to an unlawful distribution (or unfair one) is personally liable to the corporation. Similarly if a shareholder knowingly (cannot be unknowing) accepts an unlawful distribution, then the company is entitled to take the money back (recoupment).

Safe Harbor Rules

There are 3 safe harbors by which a conflict of interest transaction may be protected: 1) Disclosure of all material facts and approved by majority of board of directors 2) Disclosure of all material facts and approved by majority of shareholders 3) Fairness in the transaction = a court standard looks to see if the corporation has received something of comparable value in its exchange with the director. The burden of establishing such fairness lies with the conflicting director.

Shareholder Meetings

Two types: annual (regular) and special. A corporation is required to hold shareholder meetings annually to vote for directors. Can hold more frequently and in various places according to articles or bylaws. Standing meetings do not require notice. The failure to hold a meeting does not harm the corporation in any way but can later give rise to shareholder suits. Shareholders can always act absent a meeting in unanimous written consent. Special meetings require notice at least 10 days in advance and statement of purpose for the meeting. Meetings are usually called by the board, but a shareholder who owns 10% or more of shares can also call a special meeting. All shareholders must waive notice (in writing or presence) or object in a timely manner in order to vote at the meeting. All shareholders are entitled to disclosures of financial statements of the company which must be given out (usually quarterly). MBCA §16.20 (a) A corporation shall furnish its shareholders annual financial statements. . . that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of changes in shareholders' equity for the year unless that information appears elsewhere in the financial statements." In its public annual reports, must include: A statement that management is responsible for establishing and maintaining an adequate internal control system Management's assessment of the effectiveness of the internal control system Auditor 's opinion on management's assessment of the internal controls, and the auditor's own opinion on the effectiveness of the internal controls If there has not been a disclosure, a stockholder may petition. If the petition is denied or not granted in a timely manner, a court may order disclosure.

Voting Power

Typically each share of stock is entitled to one vote. However, in the articles a corporation can create CLASSES of stock that have greater voting power (Each share is five votes, etc.) For a decision made at a shareholder meeting to be valid, there must also be a quorum of shareholders. Usually majority is shareholder approval, but plurality may be permissible.

Shareholder Voting

Typically ownership of stock entitles the right to vote. There are 2 issues that tangle that right: 1. Who is the owner of the stock? (Proxy, gifts, etc.) 2. When is ownership measured? (Effective what date?) If stock is unpaid, you MAY not vote. A corporation who owns its own stock does not get to vote on its own stock. Treasury stock does not count as voting stock because it is unissued. However, another corporation owning stock acts as a single entity and has the same voting rights as an individual owning stock. Voting is on amending bylaws, adding procedure, director selection, and other changes to the corporation. Voting agreements must be finalized in writing and signed. They are valid for 10 years before renewal.

Indemnification & Insurance

When a director is involved in a legal action as a consequence of being a director, he may seek indemnification for the expenses incurred from the corporation. Indemnification is when the company pays out the liability in the stead of the director because the director was following the director duties. There are three types of indemnification: 1) Mandatory, 2) Prohibited, 3) Permissive. 1. Mandatory Indemnification - if a director WINS her defense of a proceeding, then corporations MUST pay for costs of the suit. 2. Prohibited Indemnification - if a director receives improper personal benefit of any kind, she is disqualified from any company indemnification. 3. Permissive Indemnification - even if a director loses a suit she can still be indemnified when: i) acted in good faith or believed reasonably to be in good faith ii) in a criminal proceeding, the director did not realize the conduct was unlawful The authorization for permissive indemnification requires the approval of majority shareholders/directors or an independent attorney chosen by such. Additionally, to avoid the will/won't question of indemnification, a corporation may acquire insurance to indemnify directors which can cover all awards against a director even if the corporation would not be able to cover those costs by its legal ability. Indemnification also extends to officers acting in their own roles.

Defective Corporation

When a person makes an unsuccessful effort to comply with the incorporation requirements, but tried in good faith to do so, that person MAY be able to escape personal liability under the de facto corporation or estoppel doctrine. De Facto Corporation - If the owner must make a good faith effort to comply with attempting to incorporate. This only applies to contractual agreements.

Direct Shareholder Action

When a shareholder sues on behalf of HIMSELF against the corporation for misconduct. Recovery goes to the shareholder. This is NOT the same as derivative (on behalf of company against company). There are two types of Direct Action: 1. Enforcement of Shareholder Rights - A shareholder may sue for breach of fiduciary duty owed by a director/officer. These actions are usually a result of interference with a shareholder's voting rights, failure to produce a dividend, or to approve/stop a merger. This can ALSO be a class action suit for THEIR interests in recovery. Shareholder sues both in his/her own capacity and on behalf of other similarly situated shareholders. I.e., many individual direct actions are brought as a single direct action brought by a "class representative." Example: Suit to compel corporation to pay the dividends that have been declared 2. Non-Shareholder Action (usually tortious) - If a shareholder is injured or wronged by the corporation outside of fiduciary duty.

Derivative Shareholder Action

When a shareholder sues on behalf of the corporation against someone within the corporation for harm suffered by the corporation. This means recovery goes directly to the corporation. This is not a class action, only one shareholder brings the derivative action because the entire corporation will recover. Shareholder must have standing to bring claim: 1) Must have been shareholder at time of misconduct OR 2) Must have been shareholder at time of action filed Regardless must continue to be a shareholder during the litigation. Upon winning, may be able to recover reasonable costs of suit from corporation. To begin a derivative action, a shareholder must make a written demand upon board of directors to make remedy and not commence court action until 90 days have elapsed from date of demand or if the rejection occurs earlier. Once the board rejects the demand, the rejection is then tested against BJR. If there is a valid business justification for the rejection, then the plaintiff bears the burden of proof to establish the board's rejection was due to a) lack of care, b) lack of loyalty, c) lack of good faith for the court to override board refusal. There are 2 instances where a shareholder plaintiff does not need to wait 90 days: 1. Futility - the demand to the board would be futile (must prove such as disinterested directors) 2. Irreparable Injury - do not have to wait if the corporation would suffer irreparable injury in the 90 day wait time. Successful derivative suits ALWAYS pierce the corporate veil.

De Jure Corporation

When all the statutory requirements for incorporation have been satisfied, then a "justly created" corporation. This means that the corporation itself is liable for all activities undertaken by the corporation and not by the individual actors.

Cumulative Voting

When more than one director is to be elected, corporations can allow shareholders to cumulate their votes and cast all those votes for the candidates. The effect of cumulative voting is to allow minority shareholders to elect representation. Ex: Annabelle owns 30/100 shares of a corporation. Bryan owns the other 70. Without cumulative voting, Annabelle will never be able to elect any of the three board directors. Annabelle only has 30 votes (Bryan has 70). With cumulative voting, Annabelle has 90 votes (30 PER director). Annabelle now has the ability to cast 90 votes against Bryan's 70 on one director. Cumulative voting is reserved for minority shareholders. Terms of directors can be annual or staggered. Staggered terms are to discourage cumulative voting.

Controlling Shareholder

When one shareholders or a group acting in concert holds a high enough percentage to enact changes at the highest level they are a controlling shareholder (50% + 1 = automatic control). In these instances because controlling shareholders own majority of decisions of corporation they have a fiduciary duty to smaller shareholders if: 1. A controlling shareholder is selling shares to an outsider 2. Seeking to eliminate other shareholders from the corporation (buyout or hostile takeover even if hostile takeovers do not have to be hostile) 3. Receiving a distribution denied to other shareholders (most common) Then there is a duty to disclose to minority shareholders any information it knew or should have known if the information TARP would consider important to vote with because nondisclosure could hurt minority shares.

Treasury Stock

When outstanding stock is reacquired by the company it goes back into the "pool" of treasury stock. If the stock is not reissued, then the number of authorized outstanding shares is automatically reduced (and other people's percentage interest goes up). It is possible for the corporation to own their own outstanding stock if it is still authorized/issued and it be separate from the treasury.