Business Law - Ch 19

proxy contest

A battle for corporate control whereby someone wishing to replace the board with its own candidates seeks to acquire a sufficient number of shareholder votes to do so.

Takeover

A bidder acquires sufficient stock from a corporation's shareholders to obtain control of the corporation.

staggered board

A board on which directors serve for specified terms, usually three years, with only a fraction of them up for reelection at any one time. Also called classified board.

classified board

A board on which directors serve for specified terms, usually three years, with only a fraction of them up for reelection at any one time. Also called staggered board.

pass-through entity

A business organization that is not a separate taxpayer; all its income and losses are passed through and taxed to its owner. S Corporations, partnerships, and limited liability companies are pass-through entities.

C corporation

A business organization that is taxed at both the entity level and the owner level.

Franchise

A business relationship in which one party (the franchisor) grants to another party (the franchisee) the right to use the franchisor's name and logo and to distribute the franchisor's products from a specified locale.

Malpractice

A claim of professional negligence.

cliff vesting

A common vesting schedule that provides that if a person granted stock options leaves within a certain period of time after employment (usually six months or a year), he or she forfeits all rights to any stock.

operating agreement

A contract that sets forth the rights, obligations, and powers of the owners, managers, and officers of a limited liability company.

closely held corporation

A corporation characterized by the absence of a market for its stock, though it may have any number of shareholders.

foreign corporation

A corporation doing business in one state though chartered or incorporated in another state is a foreign corporation as to the first state.

undercapitalization theory

A corporation is a separate entity, but its lack of adequate capital may constitute a fraud on the public. May be a basis for piercing corporate veil.

S Corporation

A corporation meeting certain requirements that is taxed only at the owner level.

close corporation

A corporation owned by a limited number of shareholders, usually thirty, most of whom are actively involved in the management of the corporation, that elects close corporation status in its charter.

target corporation

A corporation that a friendly or hostile bidder is seeking to acquire, often in a merger or sale of assets or through a tender offer.

reverse piercing

A doctrine whereby a corporation (including a subsidiary) may be held liable for the debts of a shareholder (including a parent corporation).

limited liability company (LLC)

A form of business entity authorized by state law that is taxed like a limited partnership and provides its members with limited liability, but like a corporation gives its members the right to participate in management without incurring unlimited liability.

general partnership

A form of business organization between two or more persons in which the partners share in the profits or losses of a common business enterprise.

limited partnership

A form of business organization in which limited partners must refrain from actively participating in the management of the partnership but are liable for the debts of the partnership only up to the amount they personally contributed to the partnership.

benefit corporation (B corporation)

A form of for-profit corporation, which is authorized only in certain states, that is not required to maximize shareholder value even when a change in control or break-up is inevitable. A B corporation is required to distribute to shareholders an annual benefit report providing information about their social and environmental performance, using third parties as a benchmark.

limited liability partnership (LLP)

A form of limited partnership designed primarily for professionals who typically do business as a partnership that insulates its partners from vicarious liability for certain partnership obligations.

Shareholder

A holder of equity securities of a corporation. Also called stockholder.

inside director

A member of a board who is also an officer.

outside director

A member of a board who is not also an officer.

joint venture

A one-time group of two or more persons in a single specific business enterprise or transaction.

forgotten founder

A problem that can arise when several persons work together on an informal basis with a common business objective, and then one leaves. The person who left (the forgotten founder) may have ownership rights in the enterprise.

plurality standard

A process whereby a nominee for the board of directors can be elected as long as he or she receives a plurality of the votes cast for any nominee, without regard to the number of votes withheld. Contrast with majority voting.

tender offer

A public offer to all the shareholders of a corporation to buy their shares at a stated price, usually higher than the market price.

majority voting

A requirement that a nominee for the board of directors of a corporation must receive a majority of the shares voted to be elected. Contrast with plurality voting.

proxy access rule

A rule adopted by the SEC in 2010 that would have given shareholders that have held at least 3% of a public company's stock for at least three years to nominate candidates for the board and solicit proxies without having to go through the considerable expense of commencing a proxy contest. Although the SEC rule was invalidated by the U.S. Court of Appeals for the Federal Circuit, shareholder activists have proposed shareholder resolutions to amend the corporate charter to give certain large shareholders similar access to management's proxy materials.

dissenting shareholder

A shareholder who voted against a merger, sale of assets, or other reorganization.

leveraged buyout (LBO)

A takeover financed with loans secured by the acquired company's assets, in which groups of investors, often including management, use borrowed money along with some of their own money to buy back the company's stock from its current shareholders.

straight voting

A voting process whereby a shareholder can cast one vote for each share the shareholder owns for each nominee.

Proxy

A written authorization by a shareholder to another person to vote on the shareholder's behalf.

going private

Also known as "going dark," small public companies "go private" when they have fewer than 300 shareholders and are no longer required to file public periodic reports under the Securities Exchange Act of 1934.

Corporation

An organization authorized by state law to act as a legal entity distinct from its owners.

surviving corporation

In a merger of two corporations, the corporation that maintains its corporate existence is the surviving corporation.

disappearing corporation

In a merger of two corporations, the corporation that no longer maintains its separate corporate existence is the disappearing corporation.

appraisal rights

In a merger or sale of assets, shareholders who voted against the transaction have appraisal rights, that is, the right to receive the fair cash value of the shares they were forced to give up as a result of the transaction.

freeze-out merger

In a merger with a controlling shareholder, some shareholders (usually the public shareholders) are required to surrender their shares in the disappearing corporation for cash.

sole proprietorship

One person owns all the assets of the business, has complete control of the business, and is solely liable for all the debts of the business.

general partners

Partners of a general or limited partnership responsible for managing the partnership. They are jointly and severally liable for partnership obligations.

Managers

Persons elected by the members (owners) of a limited liability company who, like a board of directors in a corporation, are responsible for managing the business, property, and affairs of the company.

certificate of incorporation

See Articles of Incorporation.

articles of incorporation

The basic document filed with the appropriate governmental agency upon the incorporation of a business. The contents are prescribed in the general corporation statutes but generally include the name, purpose, agent for service of process, authorized number of shares, and classes of stock of a corporation. It is executed by the incorporator(s). Also called the charter or the certificate of incorporation.

equity capital

The cash or property contributed to an enterprise in exchange for an ownership interest.

certificate of formation

The charter document for a limited liability company. Also called articles of organization.

articles of organization

The charter document for a limited liability company. Also called certificate of formation.

Merger

The combination of two or more corporations into one.

Dissolution

The designation of the point in time when partners no longer carry on their business together.

corporate charter

The document issued by a state agency or authority granting a corporation legal existence and the right to function as a corporation. Also called the articles or certificate of incorporation.

Quorum

The holders of more than 50 percent of the outstanding shares of a corporation.

vicarious liability

The imposition of civil or criminal liability on one party (e.g., an employer) for the wrongful acts of another (e.g., an employee). Also called imputed liability.

board of directors

The individuals elected by the shareholders of a corporation who by law are responsible for the overall management of a corporation.

Bylaws

The internal rules governing a corporation.

fictitious business name

The name of a business that is other than that of the owner.

Members

The owners of a limited liability company.

limited partners

The participants in a limited partnership whose liability for partnership business is limited to their capital contribution.

Bidder

The party who makes a tender offer.

shareholder of record

The persons whose names appear on a corporation's shareholder list on a specified date who are entitled

Termination

The point after the dissolution of a partnership when all the partnership affairs are wound up and partners' authority to act for the partnership is completely extinguished.

Incorporation

The process by which a corporation is formed.

cumulative voting

The process by which a shareholder can cast all its votes for one director nominee or allocate them among nominees as it sees fit.

winding up

The process of settling partnership affairs after dissolution.

second-step back-end merger

The second step in a corporate takeover whereby the shareholders who did not tender their shares receive cash or securities in a subsequent merger.

corporate domicile

The state under whose laws a corporation is formed.

pierce the corporate veil

When a court denies limited liability to a corporation and holds shareholders personally responsible for claims against the corporation, the court has pierced the corporate veil.

corporation by estoppels

When a third party, in all its transactions with an enterprise, acts as if it were doing business with a corporation, the third party is prevented or estopped from claiming that the enterprise is not a corporation.

de facto (in fact) corporation

When incorporators cannot show substantial compliance with incorporation requirements, a court may find a corporation is a de facto corporation (corporation in fact), even though it is not technically a corporation by law, if the incorporators demonstrate that they were unaware of the defect and that they made a good faith effort to incorporate correctly.

de jure (by law) corporation

When incorporators have substantially complied with incorporation requirements, the entity is a de jure corporation (a corporation by right).

alter ego theory

When owners have so mingled their own affairs with those of a corporation that the corporation does not exist as a distinct entity, it is an alter ego (second self) of its owners, permitting the piercing of the corporate veil.