Chapter 36: Corporate Formation and Financing
Revised Model Business Corporation Act (RMBCA)
1984 revision of the MBCA that arranges the provisions of the act more logically, revises the language to be more consistent, and makes substantial changes to the provisions. no general federal corporation law however.
debenture
a long-term unsecured debt instrument that is based on a corporation's general credit standing. often 30 years or more. if a corporation encounters financial difficulty, unsecured debenture holders are treated as general creditors of the corporations (i.e. paid only after the secured creditors' claims are paid)
corporate seal
adopted by many corporations. generally contains the name and date of incorporation. imprinted by the corporate secretary on certain legal documents.
ultra vires act
an act by a corporation that is beyond its express or implied powers. if this act occurs, shareholders can sue for an injunction to prevent the corporation from engaging in the act and sue the officers or directors who caused the act for damages. attorney general of the state of incorporation can bring an action to enjoin an act or to dissolve the corporation if the act is illegal
Issued shares
authorized shares that have been sold by the corporation
unissued shares
authorized shares that have not been issued. BoD can vote to issue unissued shares at any time w/o shareholder approval.
articles of incorporation (corporate charter)
basic governing document of the corporation. must be drafted and filed with and approved by the state before the corporation can be officially incorporated. under the RMBCA, the articles of incorporation must include: the name of the corporation, number of shares it's authorized to issue, address of the corporations initial registered office and the name of the initial registered agent, name/address of each incorporator. may also include provisions such as period of duration, limitation or regulation of corporate power, regulation of the affairs of the corporation, etc. can be amended. to contain any provision that could have been lawfully included in the original document.amendment must show that (1) BoD adopted a resolution recommending the amendment and (2) shareholders voted to approve it. after approved, articles of amendment must be filed with secretary of state. corporate existence begins when articles of incorporation are filed.
par value shares
common stock on which the corporation has set the lowest price at which the shares may be issued by the corporation. does not affect the market value of the shares. less common. RMBCA has eliminated concept of par value.
indenture agreement
contract between corporation and holder that contains the terms of a debt security. generally contains maturity date of the debt security, required interest payment, the collateral (if any), rights to conversion into common or preferred stock, call provisions, any restrictions on the corporation's right to incur other indebtedness, the rights of the holder to default and so on. trustee is generally appointed to represent the interest of the debt security holders.
conversion right
convertible preferred stock permits the preferred stockholders to concert their shares into common stock. terms and exchange rate of conversion are established when the shares are issued. this right is usually exercised when common stock significantly increases in value. however, nonconvertible stock is more common.
foreign corporation
corporation in any state or jurisdiction other than the one in which it was formed.
domestic corporation
corporation in the state in which it is incorporated
alien corporation
corporation incorporated in another country
C corporation
corporation that does not qualify to or does not elect to be federally taxed as an S corporation. any corporation with more than 100 shareholders is automatically labeled as this. corporation must pay federal income at tax at the corporate level. in addition, if it distributes its profits to its shareholders in the form of dividends, the shareholders must pay personal income tax on the dividends, i.e. double taxation.
corporate bylaws
detailed set of rules adopted by the BoD after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation. may contain any provisions for managing the business and affairs of the corporation that are not inconsistent with law or articles of incorporation. BoD have the authority to amend the bylaws unless articles of incorporation reserve the right for the shareholders. shareholders have absolute right to amend the bylaws.
voluntary dissolution
dissolution of a corporation that has begun business or issued shares on the recommendation of the BoD and a majority vote of the shares entitled to votes. to be effective, articles of dissolution must be filed with the secretary of state. corporation is dissolved on the effective date of the articles of dissolution.
judicial dissolution
dissolution of a corporation through a court proceeding instituted by the state. used when (1) corporation procured its article of incorporations through fraud, (2) exceeded or abused the authority conferred on it by law. if a court dissolves a dissolution, the court enters a decree of dissolution that specifies the date of dissolution.
preferred stock
equity security that is given certain preferences and rights over common stock. can be issued in classes or series. while they still have limited liability, preferred stockholders are generally not given the right to vote for the election of directors, or the right. can vote if there is a merger or corporation has made the required dividend payments for a certain period of time. preferences must be put forth in articles of incorporation.
common stock
equity security that represents the residual value of the corporation. no preferences (aka creditors and preferred shareholders must receive their required interest and dividend payments before common shareholders receive anything) no fixed maturity date. can be issued as different classes. in return for their investment, receive dividends by the BoD
corporation
exists as a separate legal entity (legal person). characterized by freely transferable shares unless issued pursuant to certain exemptions from securities registration, perpetual existence (exists in perpetuity unless a specific duration is stated in articles of incorporation), generally has centralized amangement composed of the BoD and officers of it.
publicly held corporations
for-profit corporations that have many shareholders. shares usually traded on organized securities markets.
government-owned corporations or public corporations
formed by government entities to meet a specific governmental or political purpose. formed pursuant to state law generally. local ones are often called municipal corporations.
private corporation
formed to conduct privately owned business. range from small one-owner entities to large MNCs such as microsoft
promoters' liability
if a corporation never comes into existence, promoters have joint personal liability on the contract unless the third party specifically exempts them from such liability. if corporation is formed, it becomes liable to the promoter's contracts only if it agrees to become bound to the contract. resolution from the BoD binds the corporation to the contract. even if the corporation agrees to be bound by the contract, the promoter remains liable unless the parties enter into novation, a three party agreement in which the corporation agrees to assume the contract liability of the promoter with the consent of the third party.
general purpose clause
included in the majority articles of incorporation. allows the corporation to engage in any activity permitted by law.
administrative dissolution
involuntary dissolution of a corporation that is ordered by the secretary of state if a corporation has failed to comply with certain procedures required by law. obtained if a corporation (1) fails to file an annual report, (2) fails for 60 days to maintain a registered agent, (3) fails for 60 days to file a statement if a registered agent was changed, (4) did not pay the franchise fee, (5) period of duration in the articles of incorporation have expired. if the corporation does not cure the default within 60 days of notification, certificate of dissolution dissolves the corporation
treasury shares
issued shares that have been repurchased by the corporation. cannot be voted by the corporation and no dividends are paid on these share. can be reissued
bond
long-term debt security that is secured by some form of collateral (e.g. real estate, personal property). a secured debenture. secured bondholder can foreclose on collateral in the event of nonpayment of interest, principal, or other specified events.
organizational meeting
meeting of the initial directors of the corporation that must be held after the articles of incorporation are filed. at this meeting, directors must adopt the bylaws, elect corporate officers, and transact such other business that may come before the meeting
no par value shares
not assigned a par value. what most shares are issued as
shareholders
owners of a corporation. they elect the BoD and vote on fundamental changes in the corporations. generally have limited liability (liable to the extent of their capital contributions)
right to participate in profits
participating preferred stock allows a preferred stockholder to participate in the profits along with the common stockholders. this is addition to the fixed dividend paid on preferred stock. terms of participation vary widely but generally common stockholders must be paid a certain amount of dividends before participation is allowed. most preferred stock IS NOT this.
incorporator
party who signs the articles of incorporation of a corporation
redeemable preferred stock aka callable preferred stock
permits a corporation to redeem (i.e. buy back) preferred stock at a future date. terms of redemption are established when the shares are issued. corporations will redeem the stock when the current interest rate falls below the dividend rate of the preferred stocks. less common than nonredeemable stock.
promoter
person who organizes and starts a corporation. sometimes enter into contracts on behalf of the corporation even before it is actually incorporated to which they are personally liable
professional corporations
private formed by professionals like lawyers, accountants, physicians, and dentists. abbreviated PC, PA (professional association), and SC (service corporation)
profit corporation or for profit corporations
private that are created to conduct a business for profit and can distribute profits to shareholders in the form of dividends
Not-for-profit corporations
private that are formed for charitable, educational, religious, or scientific purpose. prohibited by law from distributing any profit to members, directors, or officers.
closely held corporation or privately held corporation
private, for profit. shares are usually owned by a few shareholders who are often family members, relatives, or friends. can be large in size (johnson and johnson)
cumulative dividend right
provides that any missed dividend payment to a preferred stockholder must be paid in the future before the common shareholders can receive dividends.
equity securities (stock)
represent ownership rights in the corporation
liquidation preference
right to be paid before common stockholders if the corporation is dissolved and liquidated. normally a stated dollar amount.
debt securities (fixed income securities)
securities that established a debtor-creditor relationship in which the corporation borrows money from the investor to whom a debt security is issued. interest is paid on the amount borrowed. principal is repaid at some stated maturity date in the future. corporation is the debtor.
outstanding shares
shares that are in shareholder hands, whether originally issued or reissued treasury shares. only outstanding shares have the right to vote.
note
short-term debt security (under 5 years). can be secured or unsecured. usually do not contain a conversion feature. sometimes redeemable.
S corporation
status created through subchapter S revision act to allow shareholders of some corporations to avoid double taxation. pays no federal tax at the corporate level. as in a partnership, the corporation's income or loss lows to the shareholders' individual income tax returns. shareholders pay the tax on the corporation's profits even if the income is not distributed. corporations must meet the following criteria: domestic, cannot be a member of an affiliated group of corporations, no more than 100 shareholders, shareholders must be individuals, estates, or certain trusts (corporations and partnerships cannot be shareholders), shareholders must be citizens or residents of the US, cannot have more than one class of stock but shareholders do not have to have equal voting rights. file Form 2553 with the IRS. if rescind by shareholders who collectively own at least a majority, status cannot be elected for another 5 years.
limited-purpose clause
stipulates the specific purposes and activities that a corporation can engage in.
arrearages
the amount of unpaid cumulative dividends to preferred stockholders who have cumulative dividend right
authorized shares
the number of share provided for in the articles of incorporation. shareholders can vote to amend the articles to increase the amount.
dividend preferences
the right to receive a fixed dividend at set periods during the year. usually a set percentage of the initial offering price.