Ch.19- Corporations

rights of shareholders- stock certificates

-A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation.

stock warrants

-A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period.

foreign corporation

-In a given state, a corporation that does business in the state without being incorporated therein. -must get a certificate of authority sometimes, can't auto do business there except for internet or mail

more shareholder rights

-inspection rights, proper purpose -transfer of shares -dissolution: remaining assets distributed to shareholders in proportion to the % of shares owned by each shareholder

corporation

-legal entity created and recognized by state law -1 plus owners (shareholders) -authority to act and liability for its actions are separate and apart from individuals who own it -corp is recognized as a person gets many rights and privileges under state/federal law that US citizens enjoy -access to courts, can sue, be sued, due process, free speech, freedom from unreasonable search/seizure

duties and liabilities of shareholders

-not personally liable for debts of the corporation -only if the corp. fails, the shareholders can lose their investments -pierce the corp veil sometimes (fraud, undercapitalization, careless observance of corp. formalities)

limited liability of shareholders

-not personally liable for the obligations of the corp beyond the extend of their investment -pierce the veil sometimes -creditors mostly will not extend credit to small companies unless the shareholders assume personal liability

implied powers

-perform all acts reasonably necessary to accomplish its corporate purposes -can borrow, lend funds, extend credit to whom it has a legal or contractual relationship -corporate officers can bind corp in matters directly connected with ordinary business affairs

alter-ego theory

-pierce the veil b/c the corporation was not operated as a separate entity but just another side of the group or individual that actually controlled the corporation -corp. is so dominated and controlled by indv. or group that the separate identities of the person (or group) and the corp no longer distinct -helps avoid injustice or fraud that would result if wrongdoers were allowed to hide behind protection of limited liability

professional corporations

-professionals (doc, lawyer, accountants) can incorporate -PC (professional corporation), SC (service corporation), PA (professional association) -each professional liable for malpractice or breach of duty within scope of business -but torts committed by other professionals, ur not reliable for

board meetings

-recorded minutes -quorum: The number of members of a decision-making body that must be present before business may be transacted. -committee of directors: delegate certain tasks to these, more efficient -executive committee- interim management decisions between board meetings, can't declare dividends, amend bylaws, or authorize issuance of stock -audit committee: selection, compensation, oversight of independent public accountants that audit the firm's financial record

board of directors

-responsible for the overall management of the firm -members elected by shareholders -makes policy decisions, hires corporate officers and others to run daily business -corp can sue shareholder and vice versa -sometimes shareholder can sue on behalf of corp

tort liability

-responsible for tots committed by agents or officers within the scope of their employment -like an agency relationship. respondeat superior -may also be held liable for criminal acts of agents and employees provided punishment is one that can be applied to a corp (like a fine)

board rights

-right to participation -right of inspection -right to indemnification (reimbursement for legal costs, fees, damages incurred)

S Taxing

-taxed like a pship, corp income tax passed through shareholders who pay personal income tax -avoid double taxation -may have a lower tax bracket

role of directors

-ultimate authority -policymaking -selects/removes corp. officers -determine capital structure of corp. -declare dividends -NOT agents (b/c they can't control principal) or trustees (dont hold title to property for use and benefit of others)

duty to exercise reasonable supervision and dissenting directors

-votes entered into minutes. -unless dissent is entered, presume assent -if held liable for mismanagement, dissenting directors rarely held individually liable to corporation -can register dissent if unable to attend

factors that lead courts to pierce the corporate veil

1. A party is tricked or misled into dealing with the corporation rather than the individual. 2. The corporation is set up never to make a profit or always to be insolvent, or it is too "thinly" capitalized. That is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities. 3. The corporation is formed to evade an existing legal obligation. 4. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 5. Personal and corporate interests are mixed together, or commingled, to such an extent that the corporation has no separate identity.

duty of care

1. Act in good faith (honestly). 2. Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances. 3. Do what she or he believes is in the best interests of the corporation [RMBCA 8.30(a), 8.42(a)] -failure can lead to liability for negligence (unless business judgement rule applies)

order of priority

1. The U.S. Constitution. 2. State constitutions. 3. State statutes. 4. The articles of incorporation. 5. Bylaws. 6. Resolutions of the board of directors.

incorporation procedures

1. select a state of incorporation -most advantageous tax/incorporation provisions, fees, annual fees -where most business will be conducted usually 2. secure the corporate name, -state must approve -must have corp., inc., co., ltd. -domain names 3. prepare the articles of incorporation, and 4. file the articles of incorporation with the secretary of state.

private corporation

-made to benefit private -most corps are private but can serve a public purpose

liability of directors

-negligence -for crimes and torts personally or for ones committed by employees under their supervision -shareholders can sue directors if not acting in best interest of corp (shareholder's derivative suit)

election of directors

-# of directors set forth in articles or bylaws -min= fewer than 3 sometimes -term of 1 year -removal: for cause so for failing to perform required duty -vacancies: dies/resigns. shareholders or board itself can fill position. a court can invalidate election results if directors were attempting to manipulate the election in order to reduce shareholder influence

ultra vires doctrine

-A Latin term meaning "beyond the powers"; -in corporate law, acts of a corporation that are beyond its express and implied powers to undertake. -usually with non profit corps or municipal (public) corporation remedies: injunction, can bring this against transactions or seek dissolution of the corporation, shareholders can seek damages from officers/directors responsible

S corporation

-A close business corporation that has met certain requirements as set out by the Internal Revenue Code and thus qualifies for special income tax treatment. -Essentially, an S corporation is taxed the same as a partnership, but its owners enjoy the privilege of limited liability. 1. The corporation must be a domestic corporation. 2. The corporation must not be a member of an affiliated group of corporations. 3. The shareholders of the corporation must be individuals, estates, or certain trusts and tax-exempt organizations. 4. The corporation must have no more than one hundred shareholders. 5. The corporation must have only one class of stock, although all shareholders do not need to have the same voting rights. 6. No shareholder of the corporation may be a nonresident alien.

holding company

-A company whose business activity is holding shares in another company. -low or no tax offshore jurisdiction like Cayman Islands, Dubai, Hong Kong, Luxembourg, Monaco, Panama -transfer bonds, stocks, other investments -once brought onshore, they are taxed at a federal corporate income tax rate and any payments received by shareholders are taxable

publicly held corporation (public company)

-A corporation for which shares of stock have been sold to the public.

public corporation

-A corporation owned by a federal, state, or municipal government—not to be confused with a publicly held corporation -formed by govt. to meet govt. purpose -ex. AMTRAK, US postal service, Tennessee Valley Authority

close corporations

-A corporation whose shareholders are limited to a small group of persons, often only family members. -The rights of shareholders of a close corporation usually are restricted regarding the transfer of shares to others. -Close corporations are also referred to as closely held, family, or privately held corporations. -operated like a pship or sole proprietorship -doesn't need special shareholders or directors meetings, formal records of decisions -shareholder agreements can be helpful. ex. can restrict the transfer of a close corp

alien corporation

-A designation in the United States for a corporation formed in another country but doing business in the United States.

dividends

-A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held

benefit corporation

-A for-profit corporation that seeks to have a material positive impact on society and the environment. -This new business form is available by statute in a growing number of states. -diff. from corp bc >>> -Purpose: benefit public as a whole instead of just shareholder value -accountability: see if achieve a material positive impact. benefit enforcement proceeding (can sue if corp fails to pursue or create public benefit) -transparency: annual benefit report on social/environ performance and uses a third party standard to assess its performance. delivered to shareholders. posted on public website

business judgement rule

-A rule that immunizes corporate management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make. -applies when.... 1. Took reasonable steps to become informed about the matter. 2. Had a rational basis for her or his decision. 3. Did not have a conflict of interest between her or his personal interest and that of the corporation -provides broad protections to corp. decision makers, most courts apply this rule

bylaws

-A set of governing rules adopted by a corporation or other association at their first organizational meeting -deals with internal rules of management -can elect directors at first meeting

shareholder's derivative suit

-A suit brought by a shareholder to enforce a corporate cause of action against a third person -shareholders must write a demand to corp, board of directors have 90 days to act until the suit can move forward -any damages go to the corp. treasury not to shareholders personally

voting trust

-An agreement (trust contract) under which legal title to shares of corporate stock is transferred to a trustee who is authorized by the shareholders to vote the shares on their behalf.

domestic corporation

-In a given state, a corporation that does business in, and is organized under the laws of, that state.

rights of shareholders- preemptive rights

-Rights held by shareholders that entitle them to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to any outside buyers. -Preemptive rights enable shareholders to maintain their proportionate ownership and voice in the corporation. -need to be in articles of incorporation -important in close corps. b/c each shareholder owns a small # of shares ut controls a substantial interest in the corp.

watered stock

-Shares of stock issued by a corporation for which the corporation receives, as payment, less than the fair market value of the shares. -shareholder who receives watered stock must pay the diff. to the corp (personally liable)

corporation by estoppel

-Sometimes, a business association holds itself out to others as being a corporation when it has made no attempt to incorporate. -In those situations, the firm normally will be estopped (prevented) from denying corporate status in a lawsuit by a third party. -The estoppel doctrine most commonly applies when a third party contracts with an entity that claims to be a corporation but has not filed articles of incorporation. -It may also apply when a third party contracts with a person claiming to be an agent of a corporation that does not in fact exist.

articles of incorporation

-The document filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated. -State statutes usually prescribe what kind of information must be contained in the articles of incorporation. 1. The name of the corporation. 2. The number of shares the corporation is authorized to issue. 3. The name and street address of the corporation's initial registered agent and registered office. -incorporators must be listed by name/address 4. The name and address of each incorporator.

pierce the corporate veil

-To disregard the corporate entity, which limits the liability of shareholders, and hold the shareholders personally liable for a corporate obligation. -when corporate privilege is abused for personal benefit -when corporate business is treated so carelessly that it is indistinguishable from that of a controlling shareholder

shareholder

-acquisition of stock= owner -no legal title to corporate prop. but an equitable interest in the firm -no responsibility for daily management -responsible for choosing board, who does have that control -approve fundamental changes -vote/elect board

shareholder meetings

-at least annually -notify at least 10 days prior -proxy: In corporation law, a written agreement between a stockholder and another under which the stockholder authorizes the other to vote the stockholder's shares in a certain manner.

corporate earnings

-can pass them on to shareholders as dividends -or retain as profit (retained earnings), lead to higher corp profits in the future to cause stock to rise which is good for shareholders when selling stock

corp taxation

-can suspend the entity's corporate status until taxes are paid or even dissolve the corp. for failing to pay taxes -can be subject to double taxation" passed on to shareholders as dividends, they must also pay an income tax on them and the corp does not receive a tax deduction for dividends it distributes

conflicts of interest

-can't enter into or support a business that operate in direct comp. with corps on whose boards they serve -full disclosure of any potential conflicts of interest

Model Business Corporation Act (MBCA)

-codification of modern corporation law that has been influential in shaping state corporation statutes

potential problem for close corporations

-corporate assets can be used for personal benefit because the shares are held by a single person or by a few individuals 1. The commingling of corporate and personal funds. 2. The failure to hold board of directors' meetings and record the minutes. 3. The shareholders' continuous personal use of corporate property (for instance, company-owned vehicles).

improper incorporation

-de jure (rightful and lawful) existence -sometimes fail to comply with statutory mandates -de facto, courts will treat a corp as a legal corp despite the defect in its formation if the following are met 1. A state statute exists under which the corporation can be validly incorporated. 2. The parties have made a good faith attempt to comply with the statute. 3. The parties have already undertaken to do business as a corporation.

cumulative voting

-designed to allow minority shareholders to be represented on the board of directors -shareholders get a total number of votes equal to the # of board members to be elected multiplied by the # of voting shares that shareholder owns. -shareholders can cast all the votes for one director or split them

duty of loyalty

-directors and officers to subordinate their personal interest to the welfare of the corp. -can't 1. Competing with the corporation. 2. Usurping (taking personal advantage of) a corporate opportunity. 3. Pursuing an interest that conflicts with that of the corporation. 4. Using information that is not available to the public to make a profit trading securities (see the discussion of insider trading in Chapter 28). 5. Authorizing a corporate transaction that is detrimental to minority shareholders. 6. Selling control over the corporation.

duty to make informed decisions

-do whats necessary -be adequately informed -investigate, study, discuss

non-profit corporations

-ex. private hospitals, educational institutions, charities, religious organization -made for purposes other than profit -can own property and form contracts without exposing individual members to personal liability

quorum req.

-for shareholders to act during a meeting, a quorum must be present -exists when shareholders holding more than 50% of the outstanding shares are present -voting can proceed when present

corporate officers and executives

-hired by board -peresedent, VP, secretary, treasurer -corp. and managerial officers act as agents -corp officers and high level managers are employees

compensation of directors

-inside director: A person on the board of directors who is also an officer of the corporation. -outside director: A person on the board of directors who does not hold a management position at the corporation.