BULW 301: Chapter 18

Do shareholders have the ability to sue the corporation?

Yes and vice versa. If need be, a shareholder can sue on behalf of a corporation.

Shareholders

any person, company or other institution that owns at least one share of a company's stock.

The classification of a corporation normally depends on...

its location, purpose, and ownership characteristics

Board of Directors job description

must act as a body in carrying out routine corporate business. The board selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends.

Corporations may be held liable under law for...

the criminal acts of its agents and employees. Although corporations cannot be imprisoned, they can be fined.

Reasons for piercing 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. Alternatively, 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.

S Corporation

A close business corporation that has most of the attributes of a corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership.

General Info about Corp Officers

Corporate officers and other high-level managers are employees of the company, so their rights are defined by employment contracts. Nevertheless, the board of directors normally can remove a corporate officer at any time with or without cause. Most states allow someone to hold more than one corp officer position.

Corporate taxation

Corporate profits can be subject to double taxation. The company pays tax on its profits. Then, if the profits are passed on to the shareholders as dividends, the shareholders must also pay income tax on them.

Nonprofit Corporations

Corporations formed for purposes other than making a profit.

De Facto Corporations

Defect in formation is substantial. (look over specifics if time allows)

Duty of Care

Directors and officers must exercise due care in performing their duties. 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.

Remedy for Ultra Vires Act

Shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ultra vires acts.

Shareholders' Powers

Shareholders must approve fundamental changes affecting the corporation before the changes can be implemented. Shareholders also have the power to vote to elect or remove members of the board of directors.

Advantage of holding company

Some U.S. corporations use holding companies to reduce or defer their U.S. income taxes.

Liability for professional corporations

Some courts treat professional corporations somewhat like partnerships and hold each professional liable for malpractice committed within the scope of the business by others in the firm.

Piercing the Corporate Veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations.

Board of Directors

The board of directors makes the policy decisions and hires corporate officers and other employees to run the daily business operations.

Implied Powers

The corporation has the implied power to perform all acts reasonably necessary to accomplish its corporate purposes.

Voting Lists

The corporation prepares a voting list before each shareholders' meeting. The voting list contains the name and address of each shareholder as shown on the corporate records on a given cutoff date, or record date.

Prepare the Articles of Incorporation

The document that is filed with the appropriate state official, usually the secretary of state, when a business is incorporated and that contains basic information about the corporation.

Duty of Loyalty

The duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation.

Express Powers (of a corporation)

The express powers of a corporation are found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions. Corporate bylaws and the resolutions of the corporation's board of directors also establish express powers.

What happens after the corporation is officially formed?

The first organizational meeting must be held. The most important function of this meeting is the adoption of bylaws

Bylaws

The internal rules of management. Usually address voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors. The shareholders may amend or repeal the bylaws. The board of directors may also, unless the articles of incorporation or provisions of the state corporation statute reserve this power to the shareholders

What are shareholders liable for?

The nominal value of its shares. Exception: piercing the corporate veil.

Quorum of Directors

The number of members of a decision-making body that must be present before business may be transacted.

Potential problem for closed corporations

The potential for corporate assets to be used for personal benefit is especially great.

Preemptive Rights

The right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder. Preemptive rights are most important in close corporations.

Liability of Directors and Officers

They can be held liable for negligence in certain circumstances, as previously discussed. They may also be held liable for the crimes and torts committed by themselves or by corporate employees under their supervision.

What are two ways a company can allocate its profits?

They can either pass them on to shareholders in the form of dividends or retain them as profits. These retained earnings, if invested properly, will yield higher corporate profits in the future.

Shareholder Proposals

They do this by submitting a shareholder proposal to the board of directors and asking the board to include the proposal in the proxy materials that are sent to all shareholders before meetings.

Promotional Activities

Today, due to the relative ease of forming a corporation in most states, persons incorporating their business rarely engage in preliminary promotional activities. Businesspersons are personally liable for any preincorporation contracts made.

Are close corporations flexible?

Under the RMBCA, close corporations have considerable flexibility in determining their operating rules. If all of a corporation's shareholders agree in writing, the corporation can operate without directors and bylaws.

Compensation of Directors

Usually paid at least nominal sums. The board is allowed to set amount of payment (unless otherwise stated)

Qualifications of Directors

Varies depending on state and articles of incorporation. Doesn't have to be a shareholder (unless otherwise stated). Usually serve one year terms (annual shareholder meeting) but most states allow directors to serve longer.

Alter-Ego Theory

When a corporation is so dominated and controlled by an individual (or group) that the separate identities of the person (or group) and the corporation are no longer distinct.

Corporation

a legal entity created and recognized by state law. This business entity can have one or more owners (called shareholders), and it operates under a name distinct from the names of its owners.

A corporation is recognized under U.S. law as a...

a person—an artificial legal person, as opposed to a natural person. As a "person," it enjoys many of the same rights and privileges under state and federal law that U.S. citizens enjoy.

Private Corporations

are created either wholly or in part for private benefit—that is, for profit. Most corporations are private. Although they may serve a public purpose, as a public electric or gas utility does, they are owned by private persons rather than by a government.

Board of Director's Meetings

holding formal meetings with recorded minutes. 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.

Do corporations have an automatic right to do business in a state other than its state of incorporation?

No, in some instances, it must obtain a certificate of authority in any state in which it plans to do business. Once the certificate has been issued, the corporation generally can exercise in that state all of the powers conferred on it by its home state.

File the Article with the State

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

Professional Corporations

Professionals such as physicians, lawyers, dentists, and accountants can incorporate. Laws governing the formation and operation of professional corporations are similar to those governing ordinary business corporations.

Management of Close Corporations

Resembles that of a sole proprietorship or a partnership, in that control is held by a single shareholder or a tightly knit group of shareholders. As a corporation, however, the firm must meet all specific legal requirements set forth in state statutes.

Who elects the members of the board of directors?

Shareholders

The nonprofit corporation is a convenient form of organization that allows various groups to...

... own property and to form contracts without exposing the individual members to personal liability.

Other duties...

1. Directors and officers must investigate, study, and discuss matters and evaluate alternatives before making a decision. 2. Directors are also expected to exercise a reasonable amount of supervision when they delegate work to corporate officers and employees. 3. Directors' votes at board of directors' meetings should be entered into the minutes.

Shareholder Voting

Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove.

Requirements for S Corporations

1. Must be a domestic corp. 2. The corporation must not be a member of an affiliated group of corporations. 3. The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations. Partnerships and nonqualifying trusts cannot be shareholders. Corporations can be shareholders under certain circumstances. 4. The corporation must have no more than one hundred shareholders. 5. The corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights. 6. No shareholder of the corporation may be a nonresident alien.

The Articles of Incorporation requires...

1. Name of Corporation 2. # of shares of stock the corp. is authorized to issue. 3. Name and street address of corp.'s initial registered agent and registered office. 4. Name and address of each incorporator.

Differences between benefit corporations and traditional corporations

1. Purpose: Although the corporation is designed to make a profit, its purpose is to benefit the public as a whole. 2. Accountability: Shareholders also have a right of private action, called a benefit enforcement proceeding, enabling them to sue the corporation if it fails to pursue or create public benefit. 3. Transparency: must issue an annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance.

Rights of Board Members

1. Right to participation 2. Right of Inspection 3. Right of Indemnification (reimbursement)

Incorporation Procedures

1. Select the State of Incorporation 2. Secure the Corporate Name 3. Prepare the Articles of Incorporation 4. File the Articles with the State

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.

Transfer of Shares in Close Corporations

A close corporation can restrict the transferability of shares to outside persons. Shareholders can be required to offer their shares to the corporation or to the other shareholders before selling them to an outside purchaser.

Holding Company

A company whose business activity is holding shares in another company.

Crowdfunding

A cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause (such as disaster relief) or invest in a business venture (such as a startup).

Alien Corporation

A corporation formed in another country but doing business in the United States.

Tort Liability

A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior.

Public Corporation

A corporation owned by a federal, state, or municipal government—not to be confused with a publicly held corporation.

Close Corporation

A corporation whose shareholders are limited to a small group of persons, often family members.

Publicly Held Corporation

A corporation whose shares are publicly traded in securities markets, such as the New York Stock Exchange or the NASDAQ.

De Jure Corporations

A corporations that is a rightful and lawful existence.

The Business Judgement Rule

A rule under which courts will not hold corporate officers and directors liable for honest mistakes of judgment and bad business decisions that were made in good faith.

Bonds

A security that represents the borrowing of funds by firms (and governments).

Shareholders' Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third person.

Benefit Corporations

A type of for-profit corporation, available by statute in a number of states, that seeks to have a material positive impact on society and the environment.

Ultra Vires Doctrine

Acts of a corporation that are beyond its express and implied powers to undertake (the Latin phrase means "beyond the powers"). Most cases dealing with ultra vires acts involved contracts made for unauthorized purposes.

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.

Shareholder Agreement

An agreement between shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation.

Stocks

An ownership (equity) interest in a corporation, measured in units of shares

Proxy

Authorization to represent a corporate shareholder to serve as his or her agent and vote his or her shares in a certain manner. Proxies normally are revocable (can be withdrawn), unless they are specifically designated as irrevocable and coupled with an interest.

In a corporation, the responsibility for the overall management of the firm is entrusted to a...

Board of Directors

Private Equity Capital

Capital funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it. Ultimately, the private equity firm may sell shares in the reorganized (and perhaps more profitable) company to the public in an initial public offering (IPO).

Cumulative Voting

Each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the shareholder owns. (ex. he principle of cumulative voting is that no matter how the majority shareholders cast their 21,000 votes, they will not be able to elect all three directors if the minority shareholders cast all of their 9,000 votes for Dovrik)

Venture Capital

Financing provided by professional, outside investors—that is, venture capitalists, usually groups of wealthy investors and securities firms—to new business ventures. High risk. Venture capitalists also may provide managerial and technical expertise, and they nearly always are given some control over the new company's decisions

Select the State of Incorporation

For reasons of convenience and cost, though, businesses often choose to incorporate in the state in which the corporation's business will primarily be conducted. May choose another for better tax situation

Securities

Generally, stocks, bonds, or other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation.

Corporation by Estoppel

Has made no attempt to incorporate. (look over specifics if time allows)

Tax implications on S Corporations

If a corporation has S corporation status, it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation

Foreign Corporation

In a given state, a corporation that does business in that state but is not incorporated there.

Domestic Corporation

In a given state, a corporation that is organized under the law of that state.

Shareholders' Meetings

Must occur at least annually. A corporation must notify its shareholders of the date, time, and place of an annual or special shareholders' meeting at least ten days, but not more than sixty days, before the meeting date.

Secure the Corporate Name

Name is subject to state approval to ensure against duplication or deception. ll states require the corporation's name to include the word (Corp.), (Inc.), (Co.), or (Ltd.).