Chapter 16

• Indenture agreement

A contract between the corporation and the holder that contains the terms of a debt security.

• S corporations

A corporate election designed to pass through taxation to the personal taxes of the shareholders, avoiding the double taxation of C corps.

• Foreign corporation

A corporation in any state or jurisdiction other than the one in which it was formed.

• Domestic corporation

A corporation in the state in which it was formed.

• Legal entity

A corporation is a separate legal entity (or legal person) for most purposes.

• Closely held corporation

A corporation owned by one or a few shareholders.

• Voluntary dissolution

A corporation that has begun business or issued shares can be dissolved upon recommendation of the board of directors and a majority vote of the shares entitled to vote.

• Publicly held corporation

A corporation that has many shareholders and whose securities are often traded on national stock exchanges.

• Alien corporation

A corporation that is incorporated in another country.

• Multinational corporation (transnational corporation)

A corporation that operates in more than one country.

• C corporation

A corporation with more than 75 shareholders or one that does not elect to become an S corporation. It is taxed at both the corporate level and dividends distributed to shareholders are taxed on the personal income tax.

• Note

A debt security with a maturity of five years or less.

• Bylaws

A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation.

• Usurping a corporate opportunity

A director or officer steals a corporate opportunity for him- or herself.

• Fixed dividend

A dividend preference is the right to receive a fixed dividend at set periods during the year.

• Piercing the corporate veil

A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations.

• Common stock certificate

A document that represents the common shareholder's investment in the corporation.

• Duty of care

A duty that corporate directors and officers have to use care and diligence when acting on behalf of the corporation.

• Duty of loyalty

A duty that directors and officers have not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders.

• Duty of obedience

A duty that directors and officers of a corporation have to act within the authority conferred upon them by the state corporation statute, the articles of incorporation, the corporate bylaws, and the resolutions adopted by the board of directors.

• Foreign Corrupt Practices Act (FCPA)

A federal statute that makes it a crime for U.S. companies, or their officers, directors, agents, or employees, to bribe a foreign official, a foreign political party official, or a candidate for foreign political office, where the bribe is paid to influence the awarding of new business or the retention of a continuing business activity.

• Corporation

A fictitious legal entity that is created according to statutory requirements.

• Bond

A long-term debt security that is secured by some form of collateral.

• Debenture

A long-term unsecured debt instrument that is based on the corporation's general credit standing.

• Special meeting of a board of directors

A meeting convened by the board of directors to discuss new shares, merger proposals, hostile takeover attempts, and so forth.

• Regular meeting of a board of directors

A meeting held by the board of directors at the time and place established in the bylaws.

• Organizational meeting

A meeting that must be held by the initial directors of a corporation after the articles of incorporation are filed.

• Inside director

A member of the board of directors who is also an officer of the corporation.

• Outside director

A member of the board of directors who is not an officer of the corporation.

• Board of directors

A panel of decision makers, the members of which are elected by the shareholders.

• Registered agent

A person or corporation that is empowered to accept service of process on behalf of a corporation.

• Common stockholder

A person who owns common stock.

• Supramajority voting requirement

A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders.

• Shareholder resolution

A resolution that a shareholder who meets certain ownership requirements may submit to other shareholders for a vote.

• Business judgment rule

A rule that says directors and officers are not liable to the corporation or its shareholders for honest mistakes of judgment.

• Merger

A situation in which one corporation is absorbed into another corporation and ceases to exist.

• Preferred stock

A type of equity security that is given certain preferences and rights over common stock.

• Common stock

A type of equity security that represents the residual value of a corporation.

• CEO and CFO certification

According to the Sarbanes-Oxley act, the CEO and chief financial officer (CFO) of a public company must file a statement accompanying each annual and quarterly report, certifying that the signing officer has reviewed the report.

• Form 2553

An S corporation election is made by filing Form 2553 with the Internal Revenue Service (IRS).

• Unissued shares

Authorized shares that have not been sold by the corporation.

• Double taxation

C corporations are taxed first at the corporate level and then the profits distributed by dividend payments are taxed as part of the personal income of the shareholders.

• Subchapter S Revision Act

Congress enacted the Subchapter S Revision Act to allow the shareholders of some corporations to avoid double taxation by electing Subchapter S corporation status.

• Competing with the corporation

Directors and officers cannot engage in activities that compete with the corporation unless full disclosure is made and a majority of the disinterested directors or shareholders approve the activity.

• Dividends

Distribution of profits of the corporation to shareholders.

• Fiduciary duty

Duty of loyalty, honesty, integrity, trust, and confidence owed by directors and officers to their corporate employers.

• Straight voting

Each shareholder votes the number of shares he or she owns on candidates for each of the positions open.

• Corporate officer

Employees of a corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation.

• Officers

Employees of the corporation who are appointed by the board of directors to manage the day-to-day operations of the corporation.

• Negligence

Failure of a corporate director or officer to exercise the duty of care while conducting the corporation's business.

• Articles of dissolution

For a voluntary dissolution to be effective, articles of dissolution must be filed with the secretary of state of the state of incorporation.

• Secret profit

If a director or an officer breaches his or her duty of loyalty and makes a secret profit on a transaction, the corporation can sue the director or officer to recover the secret profit.

• Self-dealing

If the directors or officers engage in purchasing, selling, or leasing of property with the corporation, the contract must be fair to the corporation, otherwise, it is voidable by the corporation. The contract or transaction is enforceable if it has been fully disclosed and approved.

• Certificate of dissolution

In the case of administrative dissolution, the secretary of state issues a certificate of dissolution that dissolves the corporation.

• Administrative dissolution

Involuntary dissolution of a corporation that is ordered by the secretary of state if the corporation has failed to comply with certain procedures required by law.

• Revised Model Business Corporation Act

It arranges the provisions of the act more logically, revises the language of the act to be more consistent, and makes substantial changes in the provisions of the model act.

• Sarbanes-Oxley Act of 2002

It requires public companies to establish and maintain adequate internal controls and procedures for financial reporting.

• Model Statutory Close Corporation Supplement (Supplement)

It was added to the RMBCA to permit entrepreneurial corporations to choose to be close corporations under state law.

• Limited liability

Liability that shareholders have only to the extent of their capital contribution. Shareholders are generally not personally liable for debts and obligations of the corporation.

• Annual shareholders' meeting

Meeting of the shareholders of a corporation that must be held annually by the corporation to elect directors and to vote on other matters.

• Special shareholders' meetings

Meetings of shareholders that may be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation.

• Shareholders

Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation.

• Equity securities

Representation of ownership rights to a corporation.

• Debt securities

Securities that establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom the debt security is issued.

• Treasury shares

Shares of stock repurchased by the company itself.

• Outstanding shares

Shares of stock that are in shareholder hands.

• Issued shares

Shares that have been sold by the corporation.

• Corporation code

State statutes that regulate the formation, operation, and dissolution of corporations.

• Cumulative preferred stock

Stock for which any missed dividend payments must be paid in the future to the preferred shareholders before the common shareholders can receive any dividends.

• Participating preferred stock

Stock that allows the preferred stockholder to participate in the profits of the corporation along with the common stockholders.

• Redeemable preferred stock

Stock that permits the corporation to buy back the preferred stock at some future date.

• Convertible preferred stock

Stock that permits the preferred stockholders to convert their shares into common stock.

• Articles of incorporation

The basic governing documents of a corporation. It must be filed with the secretary of state of the state of incorporation.

• Policy decisions

The board of directors is responsible for formulating policy decisions that affect the management, supervision, control, and operation of the corporation.

• Surviving corporation

The corporation that continues to exist after a merger.

• Merged corporation

The corporation that is absorbed in a merger and ceases to exist after the merger.

• Corporate management

The directors and the officers form the corporate management.

• Termination

The ending of a corporation that occurs only after the winding up of the corporation's affairs, the liquidation of its assets, and the distribution of the proceeds to the claimants.

• Domain name

The name of a website that a corporation uses to conduct business over the Internet.

• Quorum

The number of directors necessary to hold a board meeting or transact business of the board.

• Authorized shares

The number of shares provided for in the articles of incorporation.

• Winding up and liquidation

The process by which a dissolved corporation's assets are collected, liquidated, and distributed to creditors, preferred shareholders, and common shareholders.

• Liquidation preference

The right to be paid a stated dollar amount if a corporation is dissolved and liquidated.

• Dividend preference

The right to receive a fixed dividend at stipulated periods during the year.

• Proxy

The written document that a shareholder signs authorizing another person to vote his or her shares at the shareholders' meetings in the event of the shareholder's absence.

• Delaware General Corporation Law

This law is the most advanced corporation law in the country, and the statute is particularly written to be of benefit to large corporations.

• Corporate electronic communications

Use of electronic transfers and electronic networks by corporations to communicate to shareholders and among directors.

• Court of chancery

a special court in Delaware.

• Preferred stockholder

person who owns preferred stock.