BLAWWW Chap 20

A corporation's express powers arise from:

(1) the United States Constitution; (2) the state of incorporation's constitution, as well as the constitution of any state in which the corporation does business; (3) state statutes; (4) the corporation's articles of incorporation; (5) the corporation's bylaws; and (6) resolutions (policy statements) adopted periodically by the corporation's board of directors. To the extent that any of the foregoing conflict, they take or yield priority in the order listed above.

The following factors may persuade a court to pierce the corporate veil:

(1) the plaintiff was tricked or misled into dealing with the corporation rather than the individual; (2) the corporation was created never to make a profit or had insufficient capital at the time of its formation to meet its prospective debts or potential liabilities; (3) the corporation does not observe statutorily-required corporate formalities; and (4) personal and corporate interests are commingled to the extent that the corporation ceases to have a separate identity from its owners

Non-Profit Corporation

A corporation typically formed for charitable, educational, religious, or similar purposes, and organized and operated without the goal of making a profit.

Privately-Held Corporation

A corporation whose shares are not publicly-traded, and may generally only be bought from or sold to the corporation

Publicly-Held Corporation

A corporation whose shares are sold to and held by, or on behalf of, the general public, and are traded on a public exchange

DIRECTORS

A corporation's shareholders elect (with voting rights generally in proportion to shares held) a board of directors to govern the corporation. A director is (1) elected for a term, subject to early removal for cause; (2) typically neither the corporation's agent nor personally liable for the corporation's obligations; (3) compensated for her services, but does not share in the corporation's profits (unless she owns stock); (4) entitled to (a) reasonable notice of, and to participate in, all board meetings, (b) exercise her voting rights, (c) inspect all corporate books and records, and (d) in most jurisdictions, have the corporation indemnify her for any judgment entered against her and for any legal fees and expenses incurred defending acts taken in her directorial capacity; and (5) responsible for (a) declaring and paying corporate dividends, (b) authorizing major corporate decisions, (c) appointing, supervising, and removing corporate officers and managerial employees, and (d) deciding whether to issue stock or bonds.

Duty of Loyalty

Directors and officers must place the corporation's best interest ahead of their personal interests when the two do not coincide and, as a general rule, may not (1) compete with the corporation, or otherwise usurp (take personal advantage of) a corporate opportunity, (2) have an undisclosed interest that conflicts with the corporation's interest in a particular transaction, Directors and officers must fully disclose even a potential conflict of interest. (3) engage in insider trading, (4) authorize corporate transactions detrimental to minority shareholders without their approval, (5) use corporate funds or confidential information for their personal gain, (6) engage in self-dealing (i.e., vote on corporate action so as to maximize one's own personal benefit), or (7) sell control of the corporation to a third party

Private Equity Capital

Equity firms that obtain their capital from wealthy investors in private markets and use it to invest in existing (including exchange-traded) corporations

Articles of Incorporation

should include, at a minimum, the corporation's name, the number of authorized shares, and the names and addresses of its registered agent and its incorporators (those who execute the articles), and provide authority for its future business organization and operations. Once executed, the articles are sent to the appropriate state official, along with a filing fee, in return for which the state of incorporation may issue a certificate of incorporation, or may simply stamp the articles "filed," to evidence the corporation's legal existence

CORPORATE CONSTITUTIONAL RIGHTS

A corporation is a "person" for purposes of most rights the U.S. Constitution guarantees (e.g., due process, double jeopardy, freedom of speech). However, corporations do not enjoy Fifth Amendment protection against self-incrimination or the protection of the Privileges and Immunities Clause.

An S Corporation (must):

must be incorporated in the U.S., must not be part of an affiliated group of corporations, must be owned by individuals, estates, or certain trusts (other corporations, partnerships, or nonqualifying trusts cannot own S Corporation shares), must have 100 or fewer shareholders, must have only one class of stock (although not all shares must have the same voting rights), and must not have any nonresident alien shareholders

Directors and officers must do what is necessary to become and stay informed on important corporate matters. In addition, directors are expected to

(1) make informed and reasonable decisions, (2) exercise reasonable supervision over corporate officers and employees, and (3) attend and participate in board meetings and clearly indicate their disagreement with any decision of the board. Failure to exercise the requisite care may result in personal liability for any harm the corporation suffered.

Corporation by Estoppel

A business entity that holds itself out as a corporation will normally be estopped from denying corporate status against claims by a third party

S Corporation

A close corporation that is taxed like a partnership, while affording its owners the limited liability of corporate shareholders.

Holding Company

A company, established in a low-tax or no-tax offshore jurisdiction, to which a corporation transfers its cash, stocks, bonds, and other investments to reduce its domestic tax liability

Alien Corporation

A corporation doing business in a given state, but incorporated in a foreign country (or otherwise formed, as provided for by the laws thereof). Foreign and alien corporations do not automatically have the right to do business in a state other than the one in which they are incorporated. They may be required to obtain a certificate of authority from any other state in which they want to do business. Any particular corporation doing business in several jurisdictions can be a domestic corporation in one jurisdiction and a foreign corporation in another. The distinction depends on in which jurisdiction one is assessing the corporation's activities.

Foreign Corporation

A corporation doing business in a given state, but incorporated in another state

Public Corporation

A corporation formed by a government to serve some public purpose

Private Corporation:

A corporation formed by and owned by individuals and other private interests

Domestic Corporation

A corporation incorporated in a given state and doing business in that same state

Tort Liability

A corporation is liable, under the doctrine of respondeat superior, for the torts committed by its agents or employees within the course and scope of their duties

Criminal Liability

A corporation may be liable for the criminal acts of its agents or employees, as long as the criminal sanctions can be applied to the corporation (e.g., fines).

Corporation

A legal entity (1) formed in compliance with the statutory requirements of its state of incorporation, (2) owned by shareholders whose liability is limited to their investment in the corporation, and (3) managed by (a) a shareholder-elected board of directors and (b) officers employed by the board of directors

Close (a.k.a. "closely-held") Corporation

A privately-held corporation with a small number of shareholders. A close corporation's management resembles that of a sole proprietorship or partnership, with one or a few of the owners also serving as officers and directors. To protect against majority shareholder domination, the corporation's articles may require supermajority approval of any board action.

Stock

A security representing a shareholder's purchase of an equitable share of corporate ownership

Bond

A security representing corporate debt arising from a contract (bond indenture) between the issuing corporation and the bondholder

PIERCING THE CORPORATE VEIL

At times, owners or officers or directors of a corporation will use a corporate entity to commit fraud or other illegality. In such a case, a plaintiff may be able to "pierce the corporate veil" - i.e., disregard the corporate entity and its attendant limitations on personal liability - and sue the wrongdoers individually for actions they took as owners, officers, or directors of the corporation.

Venture Capital

Capital provided by professional, outside investors to start-up and high-risk business ventures, typically in exchange for a share of ownership. The venture capitalist may also provide managerial and technical support

Corporate Taxation

Corporate profits are taxable to the corporation when they are distributed in the form of dividends, but not when they are "reinvested" in the corporation as retained earnings.

Dividends

Corporate profits distributed to shareholders in proportion to their shares held.

Retained Earnings

Corporate profits not distributed to shareholders

State of Incorporation

Delaware is a popular choice because of its corporate laws; although corporations are increasingly incorporating in the state where they plan to base their operations.

Duty of Care

Directors and officers are expected to (1) act in good faith in performing their duties, (2) exercise the care that an ordinarily prudent person would exercise in similar circumstances, and (3) act in the best interest of the corporation.

Implied Powers:

In addition and subject to its express powers, a corporation may perform all acts reasonably appropriate and necessary to accomplish its corporate purpose.

Agency

Officers are authorized agents of the corporation - although the authority of a particular officer may be limited to certain types of transactions.

Compensation

Officers are entitled to be paid for their services, but do not share in the profits of the corporation unless they own shares of its stock.

Personal Liability

Officers are generally not personally liable for the obligations of the corporation.

Oversight

Officers are subject to oversight by the board of directors (and, indirectly, by the shareholders).

Shareholders

Owners of the corporation in proportion to their ownership of corporate stock outstanding. Corporate shareholders generally enjoy limited personal liability for the corporation's obligations.

Directors

Persons elected by shareholders and responsible for overall management of the corporation.

Officers

Persons hired by the board of directors and responsible for operations of the corporation

Officers

Persons hired by the board of directors to supervise the day-to-day operations of the corporation.

Preferred Stock

Shares having priority with respect to both periodic dividends and asset distributions if the corporation dissolves, but which generally afford holders less input in corporate decisionmaking

Common Stock

Shares representing a proportionate interest in corporate voting, earnings, and net assets, but which are generally the last to receive periodic dividends and asset distributions if the corporation dissolves

Corporate Name

The corporation's proposed name must not be the same as or deceptively similar to that of an existing corporation in the state of incorporation. A corporation planning to do business in other states should check the proposed name's availability in those states.