corporation

in-kind1

(of payment) in goods or services as opposed to money.

Walkovszky1 v. Carlton1 Court of Appeals of New York223 N.E.2d 6 (1966)

ISSUE: can a party maintain a cause of action to pierce the corporate veil without alleging that a shareholder used the corporate form to conduct business sin an individual capacity? RULE: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity. REASONING: W alleged that none of Carlton's corporations had a separate existence of its own and that Carlton had organized and controlled a fragmented corporate entity. But W did not allege that Carlton was conducting business in his individual capacity.The fact that the fleet was split into many individual corporations didn't release W from that burden. -- A plaintiff may not disregard the corporate form simply Because the corporation has insufficient assets to give thePlaintiff the recovery he or she wants. - it would have been possible for W to state a valid cause of Action against Carlton in his personal capacity, but he didntNothing in the complaint stated that Carlton was doinG businesss in an individual capacity or moving personal funds in and out of the corporation. Splitting taxi companies into multiple small, underfunded corporations was a customary practice in the NY taxi world and legal. If this practice made each company's insurance coverage inadequate to protect the public, that was a problem for the legislature to solve, not a reason to piece the corporate veil. The court held that W had failed to state a cause of action against Carlton in his individual capacity. (MAJORITY) - reasoned that the purpose of incorporation is to allow proprietors to escape personal liability for corporate wrongdoing, but with limits. Courts allow plaintiffs to price the corporate veil to prevent fraud or unfairness. TEST: If a person uses control of the corporation to further the person's own personal business, the person can be liable for the corporation's acts under the agency principle of respondeat* superior. The type of liability depends on the corporate structure: * if a company is a dummy for individual stockholders carrying on business in their individual capacities, the stockholders can be personally liable. • If a corporation is a fragment of a larger combination of corporations that actually conduct one business, only the larger corporate entity is financially responsible A plaintiff can plead both causes of actions as alternatives. DISSENT: When the legislature passed the automobile-insurance minimum, it assumed that companies that could afford insurance above the minimum would in fact purchase additional insurance. The goal of the act was to ensure that there was a pot of money provided for victims of automobile accidents. Seon Cab was profitable enough to afford more than the minimum insurance coverage, but the company was kept intentionally undercapitalized. The insurance minimum should not be used here to prevent Walkovszky from the type of recovery that the law was meant to provide for, and Carlton should not be allowed to benefit from a corporate form he adopted merely to abuse it. (simplified) Judge Keating argued that Carlton's 10 corporations were intentionally undercapitalized to avoid liability for negligence by drivers. This was an abuse of the corporate privilege. Minimum liability laws weren't meant to shield individuals who formed corporations with the intent of avoiding responsibility to the public. Carlton should have been held individually liable for W's injuries. LESSON: Courts may pierce the corporate veil if the plaintiff argues that a corporation is really a dummy to further shareholders personal interests. The capitalization issue is harder. Other courts have reached different conclusions from the court in Carlton versus Walkosvss.- finding that undercapitalization can be grounds for piercing the veil.

Articles of incorporation amendment

The articles of incorporation may be amended at any time. A three-step process is normally involved. (1) First, the board of directors must recommend the amendment to the shareholders. (2) Second, the shareholders must approve the amendment. (3) Finally, the amendment must be filed with the secretary of state's office.

Articles of incorporation

also referred to as the certificate of incorporation or the corporate charter, are a document or charter that establishes the existence of a corporation in the United States and Canada. They generally are filed with the Secretary of State in the U.S. State where the company is incorporated, or other company registrar.

what does the internal affairs include?

- responsibilities of directors to shareholders

piercing the corporate veil1

An exception to the general rule that a member has no personal liability for debts or obligations of the corporation. A court may pierce the corporate veil by setting aside the principle of limited liability and disregarding the corporate entity, if the corporate form has been abused in such a way that recognizing limited liability would work unfair harm or injustice.

GOOGLE SEARCH OF PURPOSE OF CORPORATION

RANDOM PURPOSE OF CORPORATION: The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation's pursuit of this mission.

In many situations, one corporation owns all the shares of common stock of another corporation. The first corporation is generally referred to as a "parent" corporation and the second as a "subsidiary." Why would the parent choose this form of organization rather than simply run all its activities out of a single corporation (with "divisions" for separate activities)?

There are a number of reasons, but one important one is that generally the parent, like any other shareholder, is not liable for the debts of the subsidiary, so the parent can undertake an activity without putting at risk its own assets, beyond those it decides to commit to the subsidiary. Like an individual shareholder, however, a corporate shareholder must be aware of the danger that if it is not careful, the creditors of the subsidiary may be able to pierce the corporate veil of the subsidiary. The parent must also be careful not to become directly liable by virtue of its participation in the activities of the subsidiary.

What Is the Importance of Federal Statutes in a Business Associations/Business Organizations Course?

WHAT is the importance of federal statutes in a business association course? • There is no general federal corporation statute. There are, however, important federal statutes that govern certain corporate activities.The most important such federal statute is the Internal Revenue Code. Hopefully, your BA/BO professor is leaving that statute for your school's tax courses. • If not, here is what you need to know. For tax purposes, corporations are "Subchapter C corporations" or "Subchapter S corporations." Mostly Subchapter C. • The earnings of a Subchapter C corporation are subject to what you need to call "double taxation." First, the corporation itself pays taxes on its earnings. Then, second, the shareholders of the corporation who receive their share of such earnings as dividends also pay tax on those same corporate earnings. • Some corporations with fewer than 100 shareholders qualify as Subchapter S corporations and benefit from what you need to call "pass through taxation." A Subchapter S corporation does not pay taxes on its income. Shareholders are taxed when that income passes through the corporation to them.

what does it mean for a stock to be outstanding?

refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. ... A company's number of outstanding shares is not static and may fluctuate wildly over time.

Fiduciary duty of care1:

requires corporate directors to act in good faith, and with the care of an ordinarily prudent person in like position and in a manner reasonably believed to be in the best interests of the corporation. EXAM LANGUAGE: The duty of care requires that directors inform themselves "prior to making a business decision, of all material information reasonably available to them." Smith v. Van Gorkem1, 488 A.2d 858 (1985). Whether the directors were informed of all material information depends on the quality of the information, the advice available, and whether the directors had "sufficient opportunity to acquire knowledge concerning the problem before action." Moran v. Household Intern., Inc., 490 A.2d 1059 (1985). Moreover, a director may not simply accept the information presented. Rather, the director must assess the information with a "critical eye," so as to protect the interests of the corporations and its stockholders. Smith v. Van Gorkem, 488 A.2d 858 (1985).

what is a corporation's purpose?

the corporation's duty/purpose is to maximize wealth or value for its shareholders. While the law grants great latitude to the ways in which a corporation may go about maximizing wealth or value for its shareholders, it does not allow corporations to act contrary to that goal. If, for example, a corporation were to donate all of its assets to charity, while the donation might be an act of great generosity, it would not be permitted without the consent of all of the shareholders. Whether the term ultra vires or waste is used, the result is the same. Assets must be used within the corporate purpose of maximizing shareholder value, and to accomplish this goal, the company may not engage in "wasteful" acts. In these situations, many shareholders would argue that they should receive the money and make their own decisions about which charity, if any, they wish to support with their portion of the money.

quorum

the minimum number of members of an assembly or society that must be present at any of its meetings to make the proceedings of that meeting valid.

what are some of the basic elements of the corporate structure?

• shareholders • the board of directors • articles of incorporations • bylaws

CONSTRUCTIVE TRUST

A constructive trust is not an actual trust by the traditional definition. It is a legal fiction that is used as a remedy for unjust enrichment. Hence, there is no trustee, but the constructive trust orders the person who would otherwise be unjustly enriched to transfer the property to the intended party.

Boilermakers1 Local 154 Retirement Fund v. Chevron1 Corporation Delaware Court of Chancery73 A.3d 934 (Del. Ch. 2013)

CHEVRON TEST: The court found that under DE law, corporate bylaws may address subjects relating to the business of the corporation, Conduct of its affairs, and The rights or powers of its shareholders, directors, officers, or employees Generally: bylaws are procedural and process-oriented, not substantive Additionally, corporate bylaws constitute: • a binding part of the contract between a corporation and its shareholders. • And shareholders who purchased corporate stock necessarily assent to be bound by bylaws that are legally valid. --------- ANALYSIS OF THE CASE: RULE: The Court held that forum-selection bylaws adopted unilaterally by directors under a corporation's articles of incorporation are valid and enforceable under Delaware law. ANALYSIS: Here, the court stated that Chevron's and FedEx's forum-selection bylaws were process-oriented because they regulated where shareholders may file suit, not whether they may file suit or the kind or remedy they may obtain. Also, because Chevron's and FedEx's article of incorporation gave their directors the power to unilaterally adopt corporate bylaws and the directors did so consistent with the law, the shareholders were bound by the forum-selection bylaws. REASONED: The court reasoned that Chevron's and FedEx's reasons for adopting the bylaws had nothing to do with foreclosing anyone from exercising any substantive federal rights. Instead, the bylaws only dealt with channeling internal affairs cases governed by Delaware law do Delaware courts. LESSON: Upheld the statutory and contractual validity of forum-selection bylaws adopted by corporate directors without a shareholder vote.. Notably, subsequent United States Supreme Court and DE Supreme Court decisions addressing forum-selection and corporate directors' power to unilaterally adopt bylaws have only strengthened the weight given to the DE Court of Chancery's opinion in the case.

what are bylaws?

DEFINITION: • Bylaws are the rules a corporation adopts to govern its internal affairs. • Bylaws tend to be far more detailed than the articles of incorporation, for three reasons: (1) bylaws need not be filed with the state government, which means they are not part of any public record; (2) bylaws are more easily amended than articles of incorporation (see below); and (3) officers and directors tend to be more familiar with bylaws than with the articles, which makes them a ready repository of organizational rules. In the event of a conflict between a bylaw and the articles, the latter controls.

Business Judgement Rule

DEFINITION:The business judgment rule protects corporate directors and officers from liability for breach of the duty of care, so long as the challenged business decisions were made rationally, in good faith, and with adequate information. PURPOSE/POLICY: The purpose of this rule is to promote risk taking by corporations, encourage qualified individuals to serve on corporate boards, and to keep courts from second-guessing business decisions. CASES: (1) Schlensky (2) kamin

what is the duty of loyalty1?

Directors have an obligation not to put their own interests before the interests of the corporation. - This duty of loyalty supersedes the business judgment rule so that fraud may be avoided. - The burden of establishing that the duty of loyalty is not violated is on said directors. However, that burden may be met if after "rigorous scrutiny" it is determined that the transaction in question was made in good faith and would have been made even in the absence of the personal interests of the director.

The Delaware General Corporation Law, § 122, provides, "Every corporation created under this chapter shall have the power to . . . (9) Make donation for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof. . . ." Note, however, that this is one of the powers that a corporation has. Other listed powers include the power to "sue and be sued" and the power to "make contracts, including contracts of guaranty and suretyship." Thus, § 122(9) can be read merely as an authorization to make charitable contributions that serve the basic purpose of business corporations, which is to maximize profit. The courts have been extremely tolerant, however, in accepting the business judgment of the officers and directors of corporations, including their business judgment about whether a charitable donation will be good for the corporation in the long run. One of the rare exceptions to the judicial deference to the business judgment of a board of directors is found in

Dodge v. Ford Motor Company. The California Corporations Code, § 207(e), gives corporations the power to "make donations, regardless of specific corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes." (Emphasis supplied.) The New York Business Corporations Law, § 202(a)(12) (McKinney, 1986), includes in the general powers of corporations, the power "to make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof." A Pennsylvania provision, enacted in 1990, provides, as part of its rules on duties of directors, that directors "may, in considering the best interests of the corporation," consider the effects of their actions on "any or all groups affected by such actions, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located." Penn.Consol. Statutes, Title 15, § 515(a). This provision then goes further by providing that the directors "shall not be required, in considering the best interests of the corporation or the effects of any action, to regard any corporate interest or the interests of any particular group affected by such action as a dominant or controlling interest or factor." This language was part of a package of provisions intended primarily to allow Pennsylvania corporations to fend off hostile takeovers (see Chapter 7), but is not limited to such situations. The basic rule of corporate choice of law in all states is that the law of the state of incorporation controls on issues relating to a corporation's "internal 220affairs," which includes responsibilities of directors to shareholders. Thus, under the Pennsylvania statute, if a corporation is incorporated in Pennsylvania, its directors can take account of the effects of their actions on people in other states. But the actions of directors of a corporation that has its headquarters in Pennsylvania and does most of its business in that state, but is incorporated in, say, Delaware, are controlled by Delaware law. Under the federal income tax law (Int.Rev.Code of 1986, § 170(b)(2)), the deduction for charitable contributions by corporations is limited to 10 percent of taxable income. The deduction is not dependent on the existence of a business purpose for the contribution.

What does bylaws typically deal with?

The bylaws typically deal with such matters as: (1) number and qualifications of directors, (2) board vacancies, (3) board committees, (4) quorum and notice requirement for shareholder and board meetings, (5) procedures for calling special shareholder and board meetings, (6) any special voting procedures, (7) any limits on the transferability of shares, and (8) titles and duties of the corporation's officers.

corporations

The cases that examine the powers of the corporation introduce the concept that there are limits on corporate actions. Initial limits might be set in the corporation's Articles of Incorporation, but even without such limits, there are prohibitions on actions that are beyond the scope of accomplishing the purpose of the corporation, (i.e., to maximize the value of the corporation for its shareholders). The idea behind these limitations arises from the fact that the directors who serve on the Board are not the owners of the corporation (or, in instances in which they are owners, typically are not the only owners). Directors serve in the role of stewards or trustees who are charged with guiding the corporation for the benefit of its shareholders. Because of that role, there are guidelines about the actions that may be taken on behalf of the corporation and guidelines about how the directors perform their roles and the duties associated with those roles.

POWERS OF THE CORPORATION What Can Corporations Do; What Can't They Do; and How Do They Do It?

The significant actions of a corporation must be authorized or sanctioned by its Board of Directors. These days, corporations are typically authorized to act for any lawful purpose. Often this leads to the question, "What limitations are placed on a corporation or its Board?" Historically, corporations had more limited purposes, so actions taken "outside of the corporate purpose" were considered to be void or voidable as "ultra vires." Currently, this doctrine is seldom used and typically is handled under the category of "waste." However, several professors still cover the types of actions that might fall beyond the corporate purpose. The most common action addressed is an excessive charitable act. This notion of "excessive charity"[Shlensky v. Wrigley; baseball field not open at nightttime]is perhaps a backhanded way of addressing the question of who the real party in interest in the corporation is. There are many articles and papers that attempt to broaden the constituencies that fall within the parties whose interests are relevant in evaluating a corporation's actions. These groups may include customers, employees, creditors and communities. However, ultimately, the party in interest is the shareholders. While the interests of other constituencies may sometimes be considered, this may not be done at the expense of the shareholders. The idea behind this concept is that the corporation's duty/purpose is to maximize wealth or value for its shareholders. While the law grants great latitude to the ways in which a corporation may go about maximizing wealth or value for its shareholders, it does not allow corporations to act contrary to that goal. If, for example, a corporation were to donate all of its assets to charity, while the donation might be an act of great generosity, it would not be permitted without the consent of all of the shareholders. Whether the term ultra vires or waste is used, the result is the same. Assets must be used within the corporate purpose of maximizing shareholder value, and to accomplish this goal, the company may not engage in "wasteful" acts. In these situations, many shareholders would argue that they should receive the money and make their own decisions about which charity, if any, they wish to support with their portion of the money.

derivative1 action

a lawsuit brought by a corporation shareholder against the directors, management and/or other shareholders of the corporation, for a failure by management. In effect, the suing shareholder claims to be acting on behalf of the corporation, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholders. This type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by officers and the Board of Directors of a corporation.

agreement in principle

a stepping stone to a contract. Such agreements with regard to the principle are usually considered fair and equitable. Even if not all details are known, an agreement in principle may, for example, outline a schedule of royalties.

Creditors of failed corporations are often unable ti collect on outstanding corporate debts as a result of the limited liability of the corporation's owners. however, creditors can attempt to recover such debt by suing the owners individually and asking the court to

pierce the corporate veil.

common stock

shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company.