Business Law Ch. 19 (Corporations)

Factors a court considers when Piercing the Corporate Veil

- 3rd party tricked into dealing with a corporation rather than the individual - corporation is set up never to make a profit, remain insolvent or is under-capitalized - corporation is formed to evade an existing legal obligation - statutory formalities are not followed - commingling of personal and corporate interests or assets

What is a Corporation?

- A corporation is a creature of statute, an artificial "person" - Corporations can have one or more shareholders, comprised of natural persons or other business - A corporation is a legal "person," enjoys the same rights and privileges as a natural person

A corporation is a legal person, it enjoys the same rights and privileges as a natural person which are?

- Access to court systems - Constitutional guarantees of free speech, due process, etc.

Shareholders' Powers

- Approving all fundamental changes to the corporation - Amending articles of incorporation or bylaws - Approval of mergers or acquisition - sale of all corporate assets or dissolution - shareholders also elect and remove the board of directors

Corporate Powers: Ultra Vires Acts

- Corporate acts beyond the express or implied powers of the corporation - Today, ultra vires cases typically involve non-profits or municipal (public) corporations

Classification of Corporations

- Domestic - Foreign - Alien - Public and Private - Nonprofit - Close Corporations - S Corporations - Benefit Corporation

Committees of the Board

- Executive Committee - Audit Committee - Nominating Committee - Compensation Committee - Litigation Committee

Compensation of Directors

- Inside Director (officer) v. outside director; often the same person is both an officer and director, and receives compensation as an officer

Corporations: Criminal Acts

- a corporation can be liable for criminal acts, but cannot be imprisoned, only fined - however, under the 'reasonable officer' doctrine, corporate officers may go to prison

Directors and Officers

- a corporation is governed by a board of directors elected by shareholders - individual directors are not corporate agents, only the board can act as an agent and bind the corporation - a director can also be a shareholder, especially in closely-held corporations - few qualifications are required for directors

Shareholders

- acquisition of shares grants an equitable ownership interest in a corporation - shareholders have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors - controlling shareholders owe a fiduciary duty to minority shareholders

Corporate Formation: First Organizational Meeting

- after the corporation is "chartered" (created) it can do business - shareholders approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities

Corporate Powers: Implied Powers

- all acts reasonably necessary to accomplish corporate purposes - a corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise

S Corporations

- avoids federal "double taxation" of regular corporations at the corporate level - only dividends are taxed to the shareholders as personal income

Corporate Personnel

- board of directors - shareholders

S Corporations: IRS Requirements

- corporation is domestic - no more than 100 shareholders - only one class of stock - no shareholder can be a non-resident alien

Corporate Powers: Express Powers

- found in the corporation's articles of incorporation, the laws of the state of incorporation, and in state and federal corporations - corporate by-laws may also grant or limit a corporation's express powers

Conflicts of Interest

- full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally - however, if transaction was fair and reasonable, it can be approved by majority of disinterested directors

A potential Problem for Closely held Corporations can occur when?

- funds are commingled - no director meetings - shareholders use corporate property

Limited Liability of Shareholders

- generally, shareholders are not personally liable for corporate acts - in certain situations, the corporate "veil" of limited liability can be pierced, holding the shareholders personally liable

Corporation by Estoppel

- if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists - applies when a third party contracts with corporation but it has not filed articles of incorporation

Shareholders' Right: wrongful dividends; 2

- illegal dividends - director's failure to declare a dividend

Business Judgment Rule

- immunizes a director or officer from liability from bad decisions - court will not require directors or officers to manage in hindsight

Election of Directors

- in closely held companies, directors are generally the incorporators and/or the shareholders - term of office is generally for one year

Shareholders' Duties and Liabilities: Watered Stock

- issued for less than fair market value - shareholder is personally liable for difference between issued and market price

Shareholders' Duties and Liabilities: Majority Shareholders

- majority shareholders owe a fiduciary duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of control - majority shareholders own enough shares to exercise de facto (actual) control over the corporation

Duty of Loyalty: Subordination of personal interests to corporation's welfare

- no competition with corporation - no theft of "corporate opportunity" - no conflict of interests - no insider trading - no transaction that is detrimental to minority shareholders

Shareholders' Meetings: voting requirements and procedures are?

- notice of meetings - proxies - shareholder proposals - quorum requirements - voting lists - cumulative voting - shareholder voting agreements - voting trusts

Corporate Officers and Executives

- officers serve at the pleasure of the board but have fiduciary duties to company - employment relationships are generally governed by contract law and employment law - officers may be terminated for cause

Rights of Directors

- participate in corporate decisions and inspect corporate books and records - compensation; usually a nominal sum

Corporate Formation: The process of incorporation generally involves two steps:

- preliminary and promotional activities; and - the legal process of incorporation

Business Judgment Rule (BJR) occurs as long as decision was?

- reasonable, informed - made in good faith, and - in the best interests of the corporation

Board of Directors

- responsibility for 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

Shareholders' Duties and Liabilities

- shareholders are generally not liable for the contract or torts of the corporation - if the corporation fails, shareholders generally cannot lose more than their investment

Shareholder's Rights: Shareholder's Derivative Suit

- shareholders sue a third party on behalf of the corporation - if the directors fail or refuse to correct the wrong or injury - shareholders must first 'make demand' on the board which then has 90 days to decide - when shareholders bring a derivative suit, they are doing so in the name of the company, not individually

Close Corporations

- shares held by few shareholders - more informal management, similar to a partnerships - management of Closely Held Corporations - transfer of shares - shareholder agreement to restrict stock transfers

Shareholders' Rights; depending on the articles and bylaws

- stock certificates - preemptive rights - stock warrants - dividends - inspection rights - transfer of shares - rights on dissolution - shareholder's derivative suit

Incorporation Procedures

1. promotion 2. name search 3. subscribers 4. file articles of incorporation 5. state charter 6. 1st organizational meeting

Corporate Formation: 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

Rights of Directors: Indemnification

Corporation should guarantee reimbursement (indemnification) or buy liability insurance to protect the board from personal liability

Shareholder Voting: Cumulative Voting

Cumulative voting allows minority shareholders to get a board member elected; all votes for 1

Domestic Corporations

Does business within its state of incorporation

Benefit Corporations

For-profit corporation that seeks to have a material positive impact on society, but most comply with certain statutory requirements

Foreign Corporations

Formed in one state, does business in other states

Close Corporation Problems

Misappropriation of closely held corporation funds

Shareholders' Meetings

Must occur at least annually

Promotional Activities: Promoter's Liability

Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless third party agrees to hold future corporation liable

Corporations: Torts

Under respondent superior, corporation liability for torts committed by agents within the course and scope of their employment

Shareholders Rights: Preemptive Rights

allows each shareholder to maintain his proportional control

Incorporation Procedures: Secure the Corporate Name

be sure to include a Domain Name, research trade name disputes

Shareholders Rights: Stock Warrants

buy at a state price; CEO, CFO, etc. perk

Corporate Earnings and Taxation: Corporate Taxation

can be taxed twice, first to corporation, then to shareholders via dividends

Corporate Earnings and Taxation: Holding Companies (Parent Company)

company whose business activity consists of holding shares in another company, sometimes off-shore

Piercing the Corporate Veil: The Alter-Ego Theory

corporation is "alter-ego" of majority shareholder; personal and corporate interest are commingled such that the corporation has no separate identity

Duties and Liabilities of Directors and Officers

directors and officers (D&O) are fiduciaries and owe the company ethical and legal duties

Removal of Directors

directors can be removed for cause

Shareholders' Rights: dividends

distribution of corporate profits or income ordered by the board

Alien Corporations

formed in another country

Duty of Care: Duty to Make Informed Decisions

fully informed on corporate matters

Vacancies on Board

if director dies or resigns or new position created by the articles or bylaws

Piercing the Corporate Veil

in certain situations, courts will "pierce the corporate veil" (PCV) and hold shareholders personally liable in the interests of justice and fairness

Incorporation Procedures: Prepare the Articles of Incorporation:

par value of shares, the registered agent and office, incorporators, duration and purpose, and internal organization

Liability of Directors and Officers

personally liability for crimes and torts committed and for those committed by employees under their supervision

Corporate Earnings and Taxation

profits can either be kept as retained earnings or passed on to the shareholders as dividends

Board of Directors' Meetings

quorum must be present to conduct official business

Duty of Care: Dissenting Directors

rarely held individually liable to the corporation

Shareholder Voting: Voting Lists

record of stock ownership

Can shareholders sue corporations?

shareholders can sue corporation and be sued by corporation, and bring a derivative suit on behalf of the corporation in some situations

Shareholder Voting: Quorum Requirements

shareholders representing more than 50% of shares must be present to conduct business

Improper Incorporation: De facto

statutory requirements not met, but promoters made good faith effort to comply with corporate law; can only be attacked by state

Improper Incorporation: De Jure

substantial statutory requirements are met; cannot be attacked by state or 3rd parties

Liability of Directors and Officers: Shareholder derivative

suits where shareholders sue directors on behalf of corporation

Duty of Care: Duty to Exercise Reasonable Supervision

supervise officers when work is delegated