CHAPTER 18

Shareholders

*Acquisition of shares grants an equitable ownership interest in a corporation. *Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.

Duties and Liabilities of Directors and Officers:

*Directors and officers are fiduciaries and owe the company ethical and legal duties. *Their fiduciary duties include the duty of care and the duty of loyalty.

Limited Liability of Shareholders

*Generally, shareholders are not personally liable for corporate acts. *But in certain situations, the corporate "veil" of limited liability can be pierced, holding the shareholders personally liable

Corporate Earnings and Taxation

*Profits can either be kept as retained earnings or passed on to the shareholders as dividends. *Corporate Taxation: Can be taxed twice, first to corporation, then to shareholders via dividends

Corporate Personnel

*Responsibility for policy direction and overall 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

Conflicts of Interest

*The officer or director must make a 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.

Corporate officers and executives are hired by the board of directors

*They are also agents as well as employees of the corporation. *Though their rights are defined by employment contracts, the board of directors normally can remove a corporate officer at any time with or without cause

Criminal and Tort Liability

A corporation can be liable for the criminal acts of its agents and employees

Directors

A corporation is governed by a board of directors elected by shareholders. *Individual directors are not agents of corporation; only the board itself can bind the corporation. *A director can also be a shareholder, especially in closely held corporations. *Few qualifications are required to be a director

Improper Incorporation: De Jure

A corporation that has substantially complied with all conditions precedent to incorporation. •In most state, the secretary of state's filing of the articles of incorporation is conclusive proof that all mandatory statutory provisions have been met.

Benefit Corporations

A for-profit corporation that seeks to have a material positive impact on society, but must comply with certain statutory requirements. •Purpose •Accountability •Transparency EX) Patagonia Only goal cannot be making money - foster some sort of good in the environment and have to be transparent about it

M & M, Inc. filed its articles of incorporation with the secretary of state. It mistakenly misspelled one of the numbers in the street address for its principal place of business. This corporation is a A. De Jure Corporation B. De Facto Corporation C. De Lightful Corporation D. Corporation by Estoppel

A. De Jure Corporation **Only a slight error

First Organizational Meeting to Adopt Bylaws

After the corporation is "chartered"(created), it can do business. •Shareholders should approve the bylaws in First Organizational Meeting. •Shareholders elect directors, hire officers, and ratify pre-incorporation contracts and activities.

Proxies

An agent's formal authorization to vote the shares in a shareholder's absence

Shareholders' Powers:

Approve all fundamental changes to the corporation. •Amend articles of incorporation or bylaws. •Approve mergers or acquisitions, •The sale of all corporate assets, or •A dissolution. Shareholders also elect and remove members of the board of directors

ABC, Inc. has $100,000 of retained earnings. It issues dividends to its shareholders of $110,000. The creditors object to the dividend. A. The dividend is legal B. The dividend is illegal C. The dividend is negotiable D. None of the above

B The dividend is illegal

Mary commits an error in calculating a bid for her construction company. It was a highly complex bid. Mary has committed A. A sin B. A breach of the duty of care C. A breach of the duty of loyalty D. None of the above

B or D *B if being grossly negligent

ABC, Inc. has 4 shareholders, who own 50%, 25%, 15% and 10% respectively. How many shareholders will be needed to meet a quorum? A. 1 B. 2 C. 3 D. 4

B. 2 *50% person and one more

There are 100 shares issued and outstanding of ABC, Inc. Mary owns 34 shares. Dale owns 66. What percentage of dividends is Mary entitled to? A. 24% B. 34% C. 66% D. None of the above

B. 34%

Joe wants to invest in a new venture to be formed. Joe is from Panama. What business entity would Joe chose? A. Partnership B. LLC C. Subchapter S Corporation D. Sole Proprietorship

B. LLC *Not C because Subchapter S Corp cannot have any nonresident aliens as shareholders

ABC, Inc. wants to amend its articles of incorporation to allow it to make cars in addition to boats. What corporate group must vote for the amendment? A. Officers B. Shareholders C. Employees D. All of the above

B. Shareholders

Close Corporation: Transfer of Shares

Because there are few shareholders, transfer of shares to an outsider can cause management problems. •To avoid this situation, a close corporation can restrict the transferability of shares via the shareholder agreement. •Can also do away with director and shareholder meetings by shareholder agreement

Committees on Board of Directors

Boards of large, publicly held corporations typically create committees and delegate certain tasks. *Executive Committee (Compensation) *Audit Committee (Oversee Audit) **Sarbanes-Oxley requires all publicly held corporations of have audit committees

Bonds

Bonds are in the nature of loans from creditors. They have a stated maturity and interest rate. *Interest is usually paid until maturity date when Bonds are cashed in

Carly Fiorina ok'd the Hewlett-Packard merger with Compac while she was on the board of directors of HP. The merger did not work out well. But Carly completed due diligence about the merger before she voted. If she is sued by a shareholder for negligence, she can defend herself by asserting: A. Caveat-Emptor B. Respondeat Superior C. The Business-Judgment rule D. The Responsible Officer rule

C. The Business-Judgment rule

Secure the Corporate Name

Choice of a corporate name is subject to state approval to ensure against duplication or deception

Ultra Vires

Corporate acts beyond the express or implied powers of the corporation. *Articles of incorporation now adopt very broad purposes to prevent lawsuits against the corporation so ultra vires doctrine has declined in importance

Shareholder Voting

Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove. *Each common shareholder normally gets one vote per share

Domestic

Corporation does business within its state of incorporation

Alien

Corporation formed in another country

Foreign

Corporation from X state does business in Z state

Factors That Lead Courts to Pierce the Corporate Veil:

Corporation is set up *never to make a profit, *always be insolvent, *is undercapitalized, *Corporation is formed to evade an existing legal obligation. *Statutory formalities are not followed. *There is commingling of personal and corporate interests or assets

Indemnification

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

Corporate Financing

Corporations usually are financed by the issuance and sale of corporate securities

Norman owns AAA, Inc., a trucking business. Norman has never put enough money into the business to make it run. He gets sued. Under what theory could a Plaintiff pursue Norman personally? A. Respondeat Superior B. Alter Ego C. Piercing the Corporate Veil D. B and C

D. B and C

Google is a: A. public corporation B. non-profit corporation C. benefit corporation D. private corporation

D. private corporation

Right to Participation

Directors are entitled to participate in all board of directors' meetings and to be notified of these meetings.

Dividends

Distribution of corporate profits or income to shareholders based in proportion to their shares. *Dividend can be paid in cash, property, or stock (company's own or another corporation).

Right of Inspection

Each director has the right to access the corporation's books, records, facilities, and premises.

Express Powers

Found in the corporation's articles of incorporation, the laws of the state of incorporation, and in the state and federal corporation statutes *Corporate bylaws may also grant or limit a corporation's express powers

Venture Capital

Groups of wealthy investors invest in start-ups. High risk of loss to VC's. Start-ups usually have to give up large portion of firm

Shareholders' Meetings

Must occur at least annually. Notice of a meeting must be given at least ten days, but not more than sixty days, before the meeting date

Secure Domain Name

Obtaining domain name for website that matches company name is extremely important

Voting

Once a quorum is present, the directors transact business and vote on issues affecting the corporation. *Each director present at the meeting has one vote

Close Corporation

One whose shares are held by relatively few persons and is often operated like a partnership. (Closely held, or family corporations)

Liability of Directors and Officers

Personal liability for crimes and torts committed and for those committed by employees under their supervision or at their direction. *If shareholders perceive that the corporate directors are not acting in the best interests of the corporation, they may sue the directors on behalf of the corporation in a shareholder derivative suit.

Management of Closely Held Corporations

Resembles that of a sole proprietorship or a partnership

Directors' Failure to Declare a Dividend

Shareholders can ask a court to compel the directors to pay a dividend if they show that the directors have acted so unreasonably in withholding the dividend that their conduct is an abuse of their discretion

Remedies for Ultra Vires Acts

Shareholders can seek an injunction from a court to stop the corporation from engaging in ultra vires acts. *The corporation or its shareholders can also seek damages from the officers and directors who were responsible for the ultra vires acts *In certain situations, courts will "pierce the corporate veil" and hold shareholders personally liable in the interests of justice and fairness

Inspection Rights

Shareholders have right to inspect specified corporate books and records and voting lists for a proper purpose

Quorum Requirements

Shareholders representing more than 50 percent of shares must be present to conduct business

Crowdfunding

Small investors invest in start-up companies. Regulated by SEC

Duty to Make Informed Decisions

Stay fully informed on corporate matters before making decisions.

Duty of Loyalty

Subordination of personal interests to the welfare of the corporation. •No competition with corporation. •No "corporate opportunity." •No conflicts of interest •No insider trading. •No transaction that is detrimental to minority shareholders. (State specific) •No selling control over the corporation

Duty to Exercise Reasonable Supervision

Supervise officers and employees when work is delegated

The Alter-Ego Theory

The corporation is the "alter ego" of majority shareholder, and personal and corporate interest are commingled such that the corporation has no separate identity. *Courts use the alter-ego theory to avoid injustice or fraud that would result when wrongdoers are protected by limited liability

Transfer of Shares

The owner has a right to transfer stock to another person unless there are valid restrictions on its transferability

Implied Powers

The power of the corporation to perform all acts reasonably necessary to accomplish corporate purposes. (Any lawful business). •Extend credit to customers, borrow and lend funds. A corporate officer can bind corporation in contract matters connected with the ordinary business affairs of the enterprise

Professional Corporations

Those formed by a group of professionals •Lawyers •Accountants •Physicians Laws governing the formation and operation of professional corporations are similar to those governing ordinary business corporations

Nonprofit Corporations

Those formed for purposes other than making a profit (e.g., private hospitals, religious institutions and charities)

Stocks

True ownership of corporation is represented by stock. •Control •Earnings •Net Assets •Neither corporate stock buy-back nor dividend payment are required •Preferred Shareholders have preference as to dividends and payment on dissolution. Do not usually vote.

Quorum of Directors

Unless otherwise stated in the articles of incorporation or bylaws, a majority of the board of directors normally constitutes a quorum

Board of Directors' Meetings

Used to conduct business by holding formal meetings with recorded minutes. Action is taken by Resolution of B of D

Private Equity Capital

Wealthy private investors or groups buy existing corporations and then reorganize it

File the Articles with State

When articles of incorporation have been prepared and signed, they are sent to the appropriate state official, along with the required filing fee.

corporation

a legal entity created and recognized by state law *Corporations can have one or more shareholders that are comprised of natural persons or other businesses

Private corporations

are created either wholly or in part for private benefit (for profit). They can be publicly held. •New York Stock Exchange •NASDAQ

Public corporations

are formed by the government for some governmental purpose (e.g., U.S. Postal Service, AMTRAK).

respondeat superior

corporations are also liable for torts committed by agents within the scope of their employment. Example:While Ted is delivering pizza, he gets into a car accident. Ted's employer, the pizza corporation would be liable to the person Ted injured

Other Voting Techniques

•A shareholder can also vote by proxy. •Shareholders can also enter into a voting trust (an agreement under which a shareholder assigns the right to vote his or her shares to a trustee, usually for a specified period of time).

A corporation is a legal "person" and enjoys the same rights and privileges as a natural person

•Access to court systems. •Constitutional guarantees of free speech, due process, and freedom from unreasonable search and seizures. •Perpetual Existence

Duties and Liabilities of Directors and Officers: Duty of Care:

•Act in good faith (honestly). •Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances. •Do what she/he believes is in the best interests of the corporation.

S Corporations

•Avoids federal "double taxation" of regular corporations at the corporate level. •Only dividends are taxed to the shareholders as personal income

S Corporations: Requirements include:

•Corporation must be domestic. •Corporation must not be a member of an affiliated group of corporations. •Shareholders must be individuals, estates, certain trusts and tax-exempt organizations, or (under certain limited circumstances) corporations. •The corporation must have no more than one hundred shareholders. •The corporation must have only one class of stock. •No shareholder of the corporation may be a nonresident alien.

Election of Directors

•Generally, the number of directors is set forth in the articles of incorporation. •Directors are appointed at the first organizational meeting •Initially, appointed by incorporators. •Term of office is generally for one year until the first annual shareholder's meeting •Directors can be removed for cause. •When a board vacancy occurs, the shareholders or the board itself can fill the vacant position, depending on state law and the bylaws

Improper Incorporation: Corporation by Estoppel:

•If company acts like a corporation, it cannot avoid liability by claiming that no corporation exists because it did not file articles. •Applies when a third party contracts with corporation that has not filed articles of incorporation. "Officer" signs contract on behalf of corporation that doesn't exist. Reneges on contract due to lack of corporate status. Estopped to do so.

Improper Incorporation: De Facto Corporations

•If the defect in formation is substantial, the outcome will vary by jurisdiction. •Some states recognize the common law doctrine of de facto corporation, and their courts will treat a corporation as a legal one if the following three requirements are met: •A state statute exists under which the corporation can be validly incorporated. •Parties have made a good faith attempt to comply with the statute. •The parties have already undertaken to do business as a corporation.

Business Judgment Rule

•Immunizes a director or officer from liability from bad decisions. •Court will not require directors or officers to manage "in hindsight." •As long as decision was Reasonable, and, Informed, and, made in good faith, and, in the best interests of the corporation, the rule will apply.

Compensation of Directors

•Most states permit the corporate articles or bylaws to authorize compensation for directors. •Directors also receive indirect benefits (such as business contacts) and other rewards (such as stock options). •An inside director is also an officer of the corporation. •An outside director does not hold a management position in the company. •Boards typically have inside and outside directors.

Prepare the Articles of Incorporation

•The primary document needed to incorporate the business that includes basic information about the corporation and serves as a primary source of authority for its future organization and business functions. •Generally, the articles must include the following information (RMBCA 2.02): •The name of the corporation. "Inc" •The number of shares of stock the corporation is authorized to issue. •The name and street address of the corporation's initial registered agent and registered office. (Who will accept service of complaint if corporation gets sued.) •The name and address of each incorporator.

Illegal Dividends

•Those that are improperly paid from an unauthorized account or that cause the corporation to become insolvent. •Can get them back from shareholders. •Dividends normally paid from retained earnings.